Real estate is one way the soon-to-be-wealthy get their foot in the door. Just ask Donald Bren and Sun Hongbin-multibillionaires who built their fortunes by owning property.
Leasing a rental property or two can provide a lucrative and satisfying side hustle-or career. That said, property accounting is one of the biggest pitfalls for new owners. If you don't have your rental property accounting down pat, you could be missing out on bigger gains or creating tax headaches.
In this bite-sized guide, we discuss five essential tips to keep your ledgers in order.
1. Separate Personal From Business Accounts
It's critical in property management to keep rental-related funds and personal funds separate. Not only does it help you stay organized, it simplifies tasks related to reconciliation. You can pay yourself when all your ducks are in a row, avoiding the confusion of your regular paycheck and other personal expenses being in the mix.
Some landlords open different accounts for each of their individual properties. It helps to have a clear pipeline for expenses and payments unit to unit. Plus, it's easier to avail of tax deductions and avoid legal liability.
2. Understand the Various Transaction Types
Transaction types come in two basic forms: expense and income transactions. Each one ties to a property, tenant, or your business overall. For example, tenant income might refer to any of the following:
- Regular rental payments
- Lease deposits
- Parking fees
- Late payment fees
In addition, mark these different transaction types and separate them in your books.
3. Create a System for Transactions and Expenses
Owning property means keeping close track of inflow (rent payments) and outflow (property taxes and upkeep). Create a reliable system for documenting them.
Use expense spreadsheets or accounting software. Back up your records in case you lose them. Consider looking for property management resources to help you.
4. Hire a CPA
Taxes in the United States are notoriously tricky. Even non-business owners hire CPAs on a yearly basis to keep their books in order. It's not just that you could be missing important deductions; you could be overpaying or underpaying taxes.
You'll be much less likely to fall afoul of the Fed or the IRS trusting a CPA. Even for issues unrelated to tax, a CPA's professional advice is irreplaceable. They can look over your books and identify accounting hiccups.
5. Craft a Reconciliation Plan
Reconciliation, in the simplest terms, is making sure your records concur with reality. You're essentially verifying transactions and bank statements with your own spreadsheets, looking for discrepancies.
The key is to have accurate data entry. If you know exactly what's going in and out, it's easier to reconcile.
Find More Rental Property Accounting Tips
Rental property accounting is important whether you are a property owner or a CEO. Create a clear, accurate system for managing payments and expenses. Separate your accounts, hire tax help, and create a reconciliation plan.
PMI in North Atlanta provides property management services and landlord resources. Submit your property address and get our free, accurate rental analysis.