As a real estate investor, there are a lot of things you need to stay on top of to ensure the success (and profitability) of your investments; you need to keep your properties well maintained, you need to find responsible and trustworthy tenants, and you need to hire the right property management team.
But one of the most important things you need to stay on top of as an investor? Your rental property accounting.
As an owner of rental properties, it’s crucial that you keep accurate financial records and stay on top of your accounting. When you own rental properties, there is a large number of financial transactions to keep up with. There’s payments coming in (like rental payments) and payments going out (like repairs, maintenance, professional tenant screening, and background checks). And if you own multiple properties, it gets even more complicated.
With the right accounting system, it’s easy to keep your finances in order. When your finances are in order, your business runs smoothly — and tax season is a breeze.
But when they’re not in order? It can lead to costly mistakes — and trouble with the IRS.
Here are nine tips to keep your finances in order (and keep the tax man happy when April rolls around):
Keep Your Personal and Business Accounts Separate
The first tip for keeping your finances in order is to keep your personal and business accounts separate.
Rental property owners often mix their personal and business finances because it seems more convenient; rather than trying to manage multiple accounts, they figure they’ll just pay for their rental property expenses out of their own pocket and worry about separating things later.
But conducting business like that is a mistake.
Key Takeway:
When tax season rolls around, you will have to go back and comb through all of your expenses to determine which were personal and which were business related.
That is not only a huge waste of time, but if you don’t separate them properly, you’ll also end up losing out on business-related deductions — and paying more taxes as a result.
“Accidental landlords” should be especially aware of this; because you own the property and are only renting it out for a short time, you might be tempted to pay for things out of your personal account, but if you go that route, you’ll pay for it come tax time.
Choose Cash or Accrual Accounting
There’s two ways you can manage your finances as a rental property investor: the cash accounting method or the accrual accounting method.
With the cash accounting method, your income isn’t counted until it’s actually received (so, for example, you wouldn’t count rental income until your tenants have paid you) and expenses aren’t counted until they’re paid out (so you wouldn’t count a maintenance bill as an expense until the bill was paid). With the accrual accounting method, all financial transactions are recorded when they’re made, not when the cash is actually received (so, for example, if you charge your tenants rent on the 1st of the month, but they’re late with their payment and don’t pay you until the 20th, the income would still be recorded on the 1st).
Unless your rental property investments make more than $5 million per year, you can use either the cash or accrual accounting method, but it’s important that you choose one and stick with it. If you’re recording some transactions on a cash basis and some on an accrual basis, your books will quickly become a mess —and be much harder to sort out come tax time.
There are pros and cons to both the cash and accrual method; if you’re not sure which is right for your rental properties, talk to a CPA.
Use Separate Bank Accounts for Each of Your Rental Properties
If you own multiple properties, you should definitely have a separate bank account for each of your rental properties.
If you only have one bank account for all of your rental properties, it’s much harder to keep track of income and expenses. By separating your finances by rental property, you’re able to easily identify income and expenses for each rental property and keep track of the profitability of each of your investments — plus, all of your income and expenses will be organized when the time comes to do your taxes.
Have a Solid System for Tracking Your Expenses and Income
While it’s important to have a separate account for each of your rental properties, you also want to take things a step further and have a solid system in place for tracking the expenses and income for all of your properties.
Luckily, you don’t need to reinvent the wheel when it comes down to putting a system in place for managing your finances. There is a wide variety of rental property accounting software on the market to help keep your finances in order and make managing your income and expenses quick, simple, and easy.
QuickBooks is a popular piece of accounting software and is easily customizable to fit your needs. Quicken also has software designed for rental property owners, called Rental Property Manager, that many investors find helpful. Other property management software, like Buildium and AppFolio, also have accounting capabilities that can help you keep track of your finances.
Anticipate Seasonal Changes and Large Expenses
When you own properties, there are certain financial ups and downs that are par for the course. Appliances need to be replaced. Maintenance costs are higher in the winter. And, no matter how on top of things you are, there are always unexpected costs that seemingly come out of nowhere.
If you don’t anticipate those ups and downs, those large expenses can throw a wrench in your finances. Don’t wait for an expensive situation to present itself before you start thinking about how you’ll pay for it; instead, plan for the expenses so they don’t derail your finances when they inevitably occur.
Go Digital
Back in the day, most businesses — including rental properties — relied on paper. But today, it’s important that you go digital.
Paper copies (of things like rent checks or vendor transactions) can be lost. But when you create digital copies of all the income and expenses in your business, you don’t have to worry about losing anything. Everything is on digital record.
Keeping digital files also makes it easier to organize and sort everything come tax season; you can create different folders for receipts, rental payments, and expense transactions for each property.
Use 1099s and W-9s the Right Way
1099s and W-9s are important tax documents, and if you have independent contractors working at your rental properties, it’s important that you understand what they are — and how to use them properly.
A W-9 form is a form that requests the contractor’s taxpayer identification number and lets your bookkeeper or tax professional know a) what type of business they are (i.e. sole proprietor or partnership) and b) whether they need to file a 1099.
A 1099 is a form that reports a non-employee’s income from your rental property business for any given year. They need this form to file their taxes and report the income they have made from working with you. You only need to file a 1099 if a non-employee was paid more than $600 for the year.
You should have every non-employee fill out a W-9 as soon as you start working together, and if you pay them more than $600 in a calendar year, you’ll need to send them a 1099 by January 31st of the following year.
These forms are also necessary for you to file your taxes, so make sure you have all the proper documentation come tax time. And a word of caution — the penalties for not properly filing 1099s are steep, so make sure you talk to a tax professional to verify you have everything you need to file.
If You Own Multiple Properties, Hire a CPA
If you own one rental property — and you’re a whiz with numbers — it’s possible to manage your finances on your own. But if you own multiple properties (or finances just aren’t your strong suit), you should strongly consider hiring a CPA.
A CPA — and especially a CPA with experience in the real estate industry — understands how to best track and manage your income and expenses for your rental properties, how to maximize your tax benefits, and how to keep your finances running smoothly as your business grows. Your finances grow more complicated as you add more rental properties to your portfolio, and the more complicated your finances, the more you need the support of a CPA to ensure you’re not pulling your hair out come tax season.
Are they an investment? Of course. But they’re an investment that pays for itself when you factor in the time, energy, and cash they save you in managing your finances.
Get a Head Start on Your Taxes
Key Takeway:
The worst thing you can do as a rental property owner is wait until the last minute to get started on your taxes.
You should start working with your CPA on reviewing your finances and preparing your taxes well before the April 15 due date. The longer you wait, the more stressful the process — and the more likely something will slip through the cracks, costing you money.
Do yourself a favor and get a head start on your taxes.
How LEAP Can Help
Managing your finances is a hefty job. But when you work with LEAP Property Management, we take some of the burden off your shoulders and help you keep your rental property finances in order. At LEAP, we provide detailed financial reports, including a list of expenses and distributions, to all of our owners. We also manage the contractor side of your financials, ensuring you have all the financial paperwork you need come tax time.
Ready to get started? Get in touch today to learn about how LEAP Property Management can manage your properties — and help manage your financials as well!
