Effective real estate accounting will enable you to better understand your finances, accurately file taxes, and maximize tax deductions.
Property management is a many-faceted enterprise, and while attractive rental listings, low vacancy rates, and building working relationships with your tenants are all important, good real estate accounting is integral to the success of your portfolio.
Effective real estate accounting will allow you to understand the financial health of your properties, accurately file your taxes (reducing unwanted attention from the IRS), and take advantage of tax deductions, leading to greater profit margins and better opportunities for growth.
The good news is that you do not need to be a qualified accountant to master the nuances of real estate accounting. There are countless tools, tips, and tricks that will help every landlord maximize their potential.
Read on for our top actionable tips to improve your real estate accounting today.
Just because the tax filing deadline isn’t until April, this does not mean that you should ignore your accounting until February or March. Build good habits by making a concerted effort to record your income and expenses throughout the year. Whether this means daily tracking or setting aside time every week to work on organizing your data, the important thing is to get it done. You will thank yourself later.
The easiest way to do this is to use a cloud-based real estate accounting software like Landlord Studio.
Landlord Studio allows you to track income and expenses on the go, digitize receipts at the point of sale, view and reconcile transactions directly from your bank feeds, and streamline your end of year reporting.
Real estate accounting can be confusing if you don’t know where to start. It’s safe to assume that you should track everything, as long as it is related to your business as a landlord. This means that the mileage from your house to your rental property should be logged, as well as an emergency callout fee for a plumber, marketing and advertising costs, and any tenant payable expenses should all be taken note of.
If you fail to record any income and expenses and end up being selected for an audit by the IRS, you could find yourself unable to prove your financial position and at risk of missing out on deductions.
It’s all well and good tracking every cent that flows into and out of your business, but if you do not categorize them accordingly, your accounts could end up being on the messy side. Using the correct categories to sort your transactions will set you up for success when filling out the Schedule E form, which is for reporting Supplemental Income and Loss, such as rental income.
Categorizing your income and expenses will enable you to save time when filling out the form, as the categories, such as rent, advertising, utilities, commissions, and insurance, will be aligned.
Related: A Breakdown Of Your Schedule E Expense Categories
One thing that real estate accounting can allow you to do is to gain insight into the financial health of your portfolio. Using the data that you have diligently collected throughout the year, you can automatically generate reports such as profit and loss (P&L), Schedule E, mileage, income expense by category, and more. These reports can be analyzed by you and then shared with partners, employees, or your accountant.
In a similar way to how reports can reveal the financial path your business is on, metrics are a quick and easy tool that can help you monitor your cash flow, reveal potential weaknesses and inform and analyze your next investment opportunity.
Metrics such as capitalization rate can help you estimate the potential returns on a property, cash flow will indicate how well your property is operating, and occupancy rates will shed light on how often a property is vacant. All of these calculations will allow you to better understand your portfolio in more detail.
While you may have relied on spreadsheets in the past, purpose-built property management software has been developed to make your job as a landlord easier and more efficient. This is especially true when it comes to real estate accounting. With software such as Landlord Studio, you can customize and generate reports at the tap of a button and automate online rent collection and bank feed reconciliation.
At one point in time, managing your own real estate accounting would have been synonymous with stacks of paperwork, fit-to-burst filing cabinets, and boxes of barely-contained receipts. Using a receipt scanner app, you can instantly scan and digitize receipts before assigning them to the relevant property or tenant. While you will still have to retain some original receipts and documents, once digitized, they will be neatly stored and readily accessible should you need to reference them. No more digging frantically through piles of paperwork.
Another benefit of utilizing property management software is that you will have the ability to automate online rent collection and late fees. When rent is collected through Landlord Studio, for example, the income will automatically be reconciled against the relevant property. Furthermore, you can schedule automatic rent reminder emails to be sent to your tenants on a monthly basis. This will keep you safe in the knowledge that your tenants are prepared for rent day and will free up more time for other aspects of rental property management.
The beauty of modern real estate accounting is that you are no longer limited to working from just the office. Whether you have a home office, are traveling for business, or are on a routine visit to your rental property, you can take your accounting with you and track expenses in real-time. Wherever you go, you will be safe in the knowledge that you can check or update your accounts at any point in time.
Managing your own real estate accounting gives you unrestricted access to your finances, invaluable insights into your performance, and the means to streamline your daily property management responsibilities. Effective accounting is just the beginning in managing and expanding a successful property portfolio.
“We hope you found this blog interesting! However, do note that the information in this article does not constitute advice. This blog is for general informational and educational purposes only and should not be used as a substitute for competent legal and/or other advice from a licensed professional.”