Bookkeeping is important and whilst not complicated it needs to be done right.
Good bookkeeping is the backbone of any business. This is the same when it comes to managing rental properties. There are three main reasons it’s important. Understanding your property’s performance and ROI (return on investment), calculating claimable expenses, and auditing by the IRS (or other tax bodies).
Keep in mind things like mileage and depreciation which can be big savers at tax time.
Related: Key Figures for Evaluating an Investment Property
Our very first tip is to create a separate bank account for your business transactions. This should come with its own debit or credit card. Any expenses relatable to your property can come out of this account, and any income you receive from your property will go into this account.
This is actually a legal requirement if you are an LLC. But even if you’re not an LLC, keeping your personal expenses and your business expenses together is not a great idea.
Read: Should you form an LLC for your rentals?
The reason this is our very first suggestion is twofold. The first is to do with getting audited by the IRS. Do you really want them to go through all of your personal finances as well as your business expenses for evidence regarding your tax claims?
The second is that it will undoubtedly make your accounting life easier!
Imagine two scenarios.
One, all your income and expenses are going through a single account. This is the same account you buy lunch with, pay for concert tickets, buy clothes, purchase groceries, pay bills, and splurge in bars.
The end of the tax year comes along, you’ve been good and kept your accounts updated throughout the year. You just need to go through them and make sure you’ve got everything accurately accounted for. You now need to go through a full year’s worth of bank statements from your personal accounts trying to determine what was related to the property and what was a personal expense. This is going to be thousands of transactions.
Now imagine all your rentals income and expenses are kept in a separate account. At the end of the year you go through your bank statements for the business account, you know every expense here is relevant to your properties so running them against your books is easy.
When you set up your books (you can do this in excel or with the help of software like Quickbooks) you want to do it right the first time. This can be a time-consuming task.
However, Landlord Studio does offer a solution to this. You can quickly and easily set up detailed accounts in the app to track property income, outgoing expenses, and store all your supporting documents in the same place.
Using the Landlord Studio app means you can update your accounts quickly whilst on the go. You can easily reconcile your bank accounts, and in so doing you can save yourself hours every month.
Supporting documents consist of all the receipts or proof of financial transaction noted in your book.
This is another feature that makes the Landlord Studio excel. Using Landlord Studio you can quickly and easily digitize all your records and documents by simply taking a picture of them with your phone and then save them all in one place.
Supporting documents provide evidence in the event of a tax audit by the IRS that the expenses you claimed for your business are valid. Although there are advantages and disadvantages to hard copies, having mobile bookkeeping is convenient because you can keep your records up-to-date in real-time, and do away with boxes and boxes of receipts that get compiled over the years.
Related: The Benefits of Property Management Software for Landlords
All your expenses should be carefully recorded in your accounts so that you can accurately calculate your profit or loss. This is vital to determine the strength of an investment as well as for tax purposes. Having detailed and accurate itemized accounts mean you will be able to claim several expenses back against your taxes which could substantially reduce your end of the year tax bill.
Should you get audited by the IRS you will need to have detailed itemized records to prove all expenses claimed were legitimate. To help reduce issues the IRS actually defines different expense categories to aid in itemization:
Another important item to include is to track the interest on any loans. You need to track the monthly amount that you owe, payment due dates, any changes in interest rates, and the amount of time until the loan is paid off in entirety.
The next tip is to carefully reconcile your bank accounts with your books. It’s perhaps not surprising that with data entry there are often mistakes.
The process of matching your books to your bank account is called bank reconciliation. Making sure your receipts match the amount debited from your account is imperative. Mistakes happen, and companies can overcharge you, or even charge you twice!
We have recently launched our feature Bank Feeds, which allows you to connect your bank account to the app and reconcile your accounts with a tap.
By removing manual data entry needs, and adding automation to the process Landlord Studio saves real estate professionals hours every month and removes many of the common errors in bookkeeping.
Once you’ve got your books all set up you need to quickly and easily be able to generate professional reports that draw out the key figures you need and give you fast access to an overview of your financials.
Reports are a quick reference point to determine how well your business is running.
Landlord Studio has a selection of reports that you can run in the app and instantly generate. They can be generated whenever you need them and either downloaded onto your device or shared straight from the app with your accountant.
A key report to create is your P&L (profit and loss) report. Your profits and loss report should include operating earnings or the profit made before income and tax. Operating earnings are not to be confused with net income, which is the sum income after taxes and expenses.
You can also learn invaluable things, like where you are spending too much money which can help keep your properties in the green. Some profits and losses reports include sales volume as well, or the number of total units (in this case, real estate) sold during a particular time period.
As tedious as it may be to constantly be updating your accounting it must be done consistently. This is why we created the landlord studio software.
Our software allows you to quickly and easily stay on top of your accounts, generate professional reports instantly, reconcile with your bank, and more.
Ben is an author and real estate enthusiast. His interest in all things entrepreneurial has led him to work with real estate professionals all over the world, distilling their knowledge into articles and Ebooks.
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