If you’re just getting into rental property investment, you probably already have a general understanding of finances and ROI. However, managing the bookkeeping side of rental properties can be challenging. And there are some strategies and best practices specific to rental investing you should know. Today, we’ll highlight rental property bookkeeping basics, along with suggestions for managing your properties for better returns.
Rental property investing is a business. So keep your business banking separate from your personal. And taking it one step further, consider creating a separate bank account for each individual investment property you own. This will ensure you keep the revenue and expenses separate and avoid commingling assets.
Cash vs. Accrual Management Methods
The cash versus accrual methods of accounting refer to a “now” or “later” approach to invoices and revenue. In a cash system, you’ll report income as it’s received and invoices as they’re paid. In an accrual model, reports are generated when an invoice is created, or cost incurred, whether payment is received yet or not. Your budgets will be the same in either scenario. However, your cash flow month-to-month will be different. It’s worth exploring the benefits of both, before deciding how you plan to manage your accounting.
Understanding the Schedule E
Schedule E, Form 1040, reports rental property earnings or losses. If your actual expenses don’t match the line items on Schedule E, you’ll need to select the best cost category offered by the IRS. Typically, the Schedule E is intended for reporting “supplemental income and losses,” not necessarily earned income.
Bookkeeping for Long-Term Success
Rental property investors should also be keen on bookkeeping for the long term. Your financial statements, including P&L and balance sheets, are game changers to planning future growth. Monitor how the current year ROI contributes to future investment growth. Adjust CapEx (Capital Expenditures) contributions, as needed, and keep your portfolio growing in the right direction. And in keeping these bookkeeping details organized, it will make year-end tax reporting easier for your accountant or CPA professional.
Rental Property Bookkeeping Is ROI Your ROI Tracking
Balancing the books doesn’t just ensure compliance with tax filing and budget management. Your rental property bookkeeping also serves as your method for tracking and analyzing ROI results. Compare profitability between different properties. Analyze expenses and income over time to spot trends or make improvements. Bookkeeping allows you to monitor timely payables and receivables, as well.
Let’s Talk Income Channels
Your potential income streams will go beyond just collecting rent. You’ll also need to organize and document prorated rent, late fees, pet deposits, and security deposits. Your rental property bookkeeping should run a tight ship on managing those potentially refundable fees and reporting, too. Those security deposits, for example, will be recorded as a short-term liability on the balance sheet, since ideally, you’ll need to owe that back to your tenant.
Budgeting for Expenses
You’ll expect plenty of expenses when managing your rental property. But it’s important to also include a method in your bookkeeping to track those costs for the short and long-term, as well as the emergency spending. Routine maintenance is predictable. Utilities can fluctuate but can be easy to plan for in a budget. However, prepare for unforeseen legal costs that may arise with an eviction situation. And know that despite your best efforts, your AC unit almost always fails on a 100-degree Sunday. Lay in those expected costs as best you can. But don’t lose sight of proper budgeting for unpredictable or one-time spending.
Manage your rental property bookkeeping from an asset management perspective and with the help of PMI JCM Realty Group! Partnering with a knowledgeable professional to assist with your investment management might be the best advice of all.
We always explore the rental property investment trends in the Tampa area market. If this ROI-centered topic sparks an interest to learn more, sign up today for our free webinar. Discover other strategies in the webinar on How to Streamline Your Rental Portfolio for Maximum Growth! It’s just an additional topic for every rental property investor to join.
You can also find answers to your rental property questions by hopping into our Facebook group, where you can connect with other property owners interested in achieving similar ROI goals. Exchange fresh management ideas and discover shared process challenges with other rental property investing professionals. And should you have unique or specific questions that require a more in-depth, tailored solution, schedule a meeting on my calendar; let’s discuss!