From the outside looking in, people generally have a simplistic view of property management and landlording. They assume it’s as easy as buying a property, putting a listing online, and finding a tenant who pays rent each month. But as you know, it’s far more complicated than this – particularly when it comes to handling the financials.
Try These 7 Tips and Techniques
The accounting that comes with managing a rental property can be complex. Not only are there tax implications, but there are also challenges with budgeting and cash flow. Knowing how to streamline these bookkeeping responsibilities will make your job significantly easier.
1. Set Up Dedicated Bank Accounts
The most important foundational element of a good accounting system is to have dedicated bank accounts for your real estate investments. While it may not be illegal, mixing personal expenses with real estate expenses is a good way to get yourself in tax trouble. And if you have an LLC to provide legal protection, it could immediately compromise the safeguards that you think you have in place.
At the very least, you need a separate bank account for your rental real estate and your personal money. For even better organization and accuracy, consider opening a separate account for every rental property you own. Come tax season, you’ll thank yourself.
2. Choose the Right Accounting Method
In terms of accounting, you’ll have to choose whether you want to do cash basis or accrual basis accounting. Both have their own set of pros and cons, so you’ll have to decide which is most comfortable or effective in your situation.
“The cash basis of accounting recognizes revenues when cash is received, and expenses when they are paid. This method does not recognize accounts receivable or accounts payable,” accountant Cameron McCool explains.
The biggest benefit of cash basis accounting is that it’s extremely simple to maintain. You simply identify when a transaction has occurred and there’s no need to track receivables or payables. It also provides a pretty good idea of how much cash the business has on hand at any given time.
Under the accrual basis method, revenues and expenses are recorded when they’re earned (regardless of when money changes hands).
“The upside is that the accrual basis gives a more realistic idea of income and expenses during a period of time, therefore providing a long-term picture of the business that cash accounting can’t provide,” McCool notes.
If you don’t have any accounting experience, you’ll probably find cash basis bookkeeping to be easiest. It’s simple, straightforward, and provides a nice overview of where things stand at any given moment.
3. Know What Records You Must Keep
“One of the great benefits of being a landlord is the tax deductions you can take advantage of. These deductions, however, can be complicated, so it is important that you keep detailed records of all important documents, income, and expenses throughout the year,” property management expert Erin Eberlin suggests. “Being organized and keeping the proper documents can help you maximize your deductions and reduce stress.”
To be on the safe side, you should save any and every financial document and receipt that you come across. The IRS is known for auditing real estate businesses – particularly if they operate at a loss in consecutive years – and you don’t want to get caught unprepared.
At the very least, make sure you keep all permanent records – including leases, legal documents, property permits, insurance policies, loan documents, previous years’ taxes, property title and deed, etc.
4. Run Conservative Cash Flow Projections
Any time you’re preparing to buy a new rental property or make significant changes to one you already own, it’s important that you run cash flow projections.
Cash flow projections should be conservative to provide you with a cushion to fall back on. They should also be detailed, so as not to underestimate exactly where your money is going.
5. Stay Organized
The more organized you are as a landlord, the few problems you’ll have. In addition to staying out of tax troubles with the IRS or local governing bodies, you’ll also save a tremendous amount of time that would otherwise be wasted on tracking down old records.
In today’s world, you can easily keep digital copies of everything, which cuts down on the amount of paper you need to handle. Most people, however, find it best to keep a paper file for each property and then periodically scan these same files into a digital format that can be kept on the cloud. By keeping information in two locations, you lessen the negative impact of a disaster.
6. Avoid Shortcuts
If you run across a hack or strategy that promises to be a financial shortcut, it’s almost certainly too good to be true. There are no shortcuts or bypasses with bookkeeping. The only way to be successful is to be thorough. Don’t let anyone tell you otherwise.
7. Hire a CPA
You might be capable of handling some simple cash basis accounting for a single property, but there comes a point in time where a limited knowledge of bookkeeping comes back to bite you. If you have multiple properties in your portfolio, it’s wise to consider hiring a CPA.
Green Residential to the Rescue
At Green Residential, we aren’t just property managers. We’ve been involved in the Houston real estate market for more than 30 years and have a comprehensive understanding of what it takes to set landlords and investors up for long-term success.
Leon Green, the Vice President of Green Residential, is a Certified Public Accountant and personally oversees the finances of each home under our management. This means you can rest easy knowing that all income, expenses, and security deposits are accounted for, organized, and documented. Plus, you’ll receive an electronic accounting statement each and every month, so that you know exactly where your properties stand.
For additional information on our property management services, please contact us!