We understand that a real estate investor is burdened with loads of work which includes managing one or more properties, their maintenance, finding reliable tenants, and ensuring the overall profitability of the business. With all these responsibilities real estate accounting or bookkeeping tends to take a back seat.
However, accounting for all the financial transactions is a crucial aspect of any business. Failing to keep a track of the income and expenses can prove costly and also increases your burden during the tax filing season.
But do not worry, we have a list of practical tips and techniques that will help any real estate investor to be on top of their rental property accounting:
Separate Personal and Business Accounts
The first and the most basic tip to keep in mind is to separate personal and business accounts. Rental property owners tend to pay for management of their properties through their personal accounts.
Although this sounds easier, it mixes your personal expenditure with expenses incurred on maintenance of rental properties causing confusion. A separate account helps a property investor track income, expenditure, maintenance costs, and even vacancies.
Open a Separate Account for Each Rental Property
When owning multiple rental properties, we suggest you open a separate account for each one.
Keeping a separate account for each property simplifies filing taxes and aids in the calculation of profit and loss on each property. Additionally, the investor can also identify properties that are proving to be non-profitable and take measures towards the same.
Income and expenditure tracking forms the crux of real estate accounting. A tracking system needs to be in place to track the flow of income and expenditure incurred on each property and for the business overall. Investors can use custom-made worksheets to record their expenses or can opt for rental accounting software.
Choose Between the Cash and Accrual Accounting Methods
Choosing an accounting method is an important step in setting up the expenses tracking system.
If the real estate investor prefers to log income and expenses based on when it is earned or deducted irrespective of when the cash is received or paid, then they can opt for the accrual accounting method.
Investors can alternatively opt for the cash accounting method where they log income and expenditure while receiving or paying out cash.
The choice of method is a matter of preferences. However, we advise you to stay consistent and file all transactions using a single accounting method.
Use Digital Applications
Using digital applications and services help investors integrate real estate accounting for different properties and analyze the profitability of each of them individually as well as identify units impact on the overall profitability of the business.
Digitizing invoices and data also enable investors to access data from anywhere even while travelling. Furthermore, using advanced tools and past data investors can forecast future prospects, income, and expenditure. Digital applications also aid in decluttering the workspace and lend a helping hand in saving the planet.
Apart from these, investors can hire experienced Certified Personal Accountants (CPAs) to manage their accounts and track their income and expenses.
Make Use of the Best!
Efficient real estate accounting has a plethora of advantages. Investors can use accounting to protect themselves from fraud or debt, forecast future income and expenditure, save time and money while filing taxes, and adjust their business operations to ensure maximum profitability.