The Investors Guide To Property Management Accounting

One aspect of running a rental that often gets pushed to the side is property management accounting. Despite its importance, it’s often the last thing a landlord wants to do, yet the longer it gets left the larger the task becomes.

To run a successful business (and your rental properties are a business), landlords need to keep accurate up-to-date books throughout the tax year. This will enable you to claim every available deductible expense and gain a greater understanding of your portfolio's financials so that you can optimize your rental's performance to maximize cash flow.

In this article, we take a look at everything you need to know about property management accounting, and how to choose the right software to keep your books up-to-date.

What is Property Management Accounting?

Property management accounting, also known as landlord accounting, is, very simply, the process of tracking income and expenses related to your rental properties.

Generally, in this scenario income is rent received and expenses can be anything from ongoing maintenance, landscaping or gardening, advertising costs, travel expenses, and so on. At the end of the tax year. You will most likely be required to fill out a Schedule E form as part of your 1040 and declare all of the income received and all of your deductible expenses.

Keeping inaccurate books, or waiting until the end of the year to do your financials, often results in missing allowable expenses, and thus overpaying your taxes. Additionally, the IRS requires you to keep all of your receipts and related documentation as proof. If you don’t have all of your receipts and proofs of expenses the IRS may not honor your claims.

How to Set Up Your Property Management Accounting

Making mistakes when starting can cause serious issues later. Thankfully, most mistakes are easily avoidable once you understand how property management accounting works.

1. Set Up Separate Accounts

An all too common early accounting error involves conducting property and other business transactions through a personal account. This action is strongly frowned upon by the IRS. However, there are additional compelling reasons to maintain a clear distinction between your personal and business accounts.

Foremost, intermingling these accounts can create chaos within your accounting procedures and render accurate tracking of business transactions nearly impossible. To rectify this situation, the best course of action is to establish a dedicated account solely for business use. Ideally, a business checking account tailored for business-related activities should be employed.

By implementing this approach:

• All revenue linked to properties will channel into this designated business account.
• Every expense will be settled from this same account (or multiple accounts in the scenario of intricate rental property bookkeeping).

You should also create separate bank accounts for each property and keep your financials for each separate as you will need to report your taxable income for each separately at the end of the year.

2. Decide on Accrual vs Cash Basis Accounting

Accrual basis accounting and cash basis accounting are two different methods used to record and report financial transactions in accounting. They differ primarily in terms of when transactions are recorded and recognized in the financial statements.

• Accrual basis accounting records transactions when they occur, regardless of cash flow.
• Cash basis accounting records transactions only when cash changes hands.

Small businesses or in the case of real estate sole proprietors often opt for cash basis accounting due to its simplicity and alignment with actual cash flow. However, if you’re operating a larger portfolio with employees accrual-basis accounting may be required for financial reporting as it provides a more comprehensive and accurate view of a company's financial health. 

Accrual Basis Accounting Example

If a company provides services to a customer in December but doesn't receive payment until January, under accrual accounting, the revenue would be recognized in December when the service was provided.

Cash Basis Accounting

Using the same example as above, with cash basis accounting, the revenue would be recorded in January when the payment is actually received, even though the service was provided in December.

4. Financial Reports You Should Know and Use

You can use your financial reports for all kinds of things and are essential for running a profitable rental business. A few examples you can use your reports for include:

• Obtaining funding, whether via a loan or investors
• Identifying accounting errors that are leading to overspending or wasted funds
• Uncovering areas for improvement in how you're managing or spending your money
• Doing your rental property taxes

A few examples of important accounting statements you'll want to make yourself familiar with:

• Profit and loss statement
• Cash flow statement
• Income statement
• Rent ledger

Property Management Accounting: Best Practices

Having established the fundamentals, it's now time to delve into property management accounting best practices. These recommended approaches should be kept top of mind when choosing and setting up your property management accounting system.

1. Update and Analyze Your Financials Regularly

As a rental business owner, it's essential to update and review your financials on a regular basis. This is the only way for you to assess your portfolio’s performance and is essential if you want to run a profitable rental portfolio. 

For example, we always check our T12 report each month. This allows us to stay on top of cash flow and identify opportunities to reduce spending and increase profitability. 

A T12 report or trailing 12-month report is a profit and loss statement broken down by month that shows the last twelve months of income and expenses. You want to review the following:

• Rental cash flow
• Expenses and deductibles

In addition to keeping on top of your income and expenses it’s important to also review the following at least once a year: 

• Capital appreciation: The increase in the value of a property
• Debt paydown: How effectively the property is being paid down
• Tax shelter: All utilized tax deduction. Plan for Unexpected Expenses

2. Plan for Unexpected Expenses

Even if all of your maintenance work is up to date, there's always a chance that an unforeseen expense will crop up. Rather than finding yourself in a rush to generate funds for an unexpected purchase it's wise to maintain a contingency fund. Examine your expenses from the past year, particularly those that emerged unexpectedly, and strive to set aside sufficient funds to address comparable costs in the upcoming year. This fund should also allow you to cover mortgage payments and bills should the property be deemed uninhabitable for a period.

3. Track Deductible Expenses

A substantial aspect of property management accounting involves monitoring your expenditures to ensure precise tax reporting. Among the most pivotal aspects is monitoring deductible expenses, as they can substantially lower your tax liability by the year's end. Numerous potential deductions exist in the realm of rental property management.

Here's a list of expense categories that you will need to report on your Schedule E:

• Advertising
• Auto and travel
• Cleaning and maintenance
• Commissions
• Insurance
• Legal and other professional fees
• Management fees
• Mortgage interest
• Other interest
• Repairs
• Supplies
• Taxes
• Utilities
• Depreciation expense or depletion
• Other (list)

For more details on your Schedule E expense categories read our article here.

You can also view a complete list of potential deductions in IRS Publication 535, Business Expenses.

4. Digitize Receipts

There are a number of reasons landlords should digitize their receipts when organizing their property management accounting. Digitizing receipts streamlines record-keeping, simplifies financial management, reduces the risk of lost or faded receipts, and helps landlords maintain accurate and organized financial records, which is crucial for effective property management and tax compliance (especially should you face an IRS audit).

The best property management accounting software will have a receipt scanner built-in. 

5. Use Accounting Software to Save Time and Effort

While using a basic Excel spreadsheet remains an option for managing your accounting, there's now a significantly more efficient alternative: software. In the present day, particularly dedicated property management software, offers a much more streamlined approach to accounting.

Accounting software allows you to automate numerous tasks that would otherwise demand hours of manual effort each month. Additionally, it provides instant access to a diverse array of reports, all at your fingertips and in a matter of seconds. Moreover, opting for real estate accounting software grants you access to capabilities that standard accounting software cannot provide.

The specific features vary based on the software, but they often encompass invaluable tools like an integrated tenant portal, automated rent payment processing, and a comprehensive work order management system.

6. Send Your Annual Taxes to a Professional Accountant

The scope of your business can vary, leading to property management being undertaken either individually or within a sizeable team. In cases of smaller operations, there's a tendency to believe that managing all tasks independently, rather than engaging an accountant, is more straightforward. This inclination arises from the prospect of saving a bit of extra cash.

However, when it concerns property management accounting it's advisable to entrust your tax affairs to a professional. A good accountant will be able to help you save money and leverage tax loopholes whilst ensuring you avoid the dreaded IRS tax audit.

Your Property Management Accounting Cycle

Landlords need to keep up-to-date books throughout the tax year. This means tracking expenses in real-time and running through a monthly accounting cycle. 

What you don’t want to happen is for this task to build up until the end of the year so that you then have to collect various disparate pieces of paper and manually enter hundreds of transactions at once. Not only is this tedious and unnecessarily time-consuming but more often than not will result in inaccurate books and overpaid taxes.

Your accounting cycle should look something like this:

Receive rents

Good property management accounting software will allow you to integrate your bank account and collect rent via ACH payments.

If your software doesn’t do this you may be able to manually set up ACH transfers with your tenants. Once the rents are received you need to log your income into your property accounting system, deducting any fees associated with the transfer.

With Landlord Studio this is all done automatically. Tenants set up recurring ACH payments through the software, and the income is automatically tracked.

Process invoices

You will likely have received invoices throughout the month for everything from maintenance, landscaping, even utilities if you are responsible for them, and other expenses that you are responsible for such as HOA fees. You will want to make sure that all of these invoices have been paid. And all of these expenses are entered into the system with the relevant support documentation stored as well.

Bank reconciliation

Using a system like Landlord Studio you can connect your bank account, and then view and reconcile expenses from your bank feeds. Doing this reduces the need for manual data entry and makes it faster and more accurate to track your expenses. Log into your Landlord Studio account, open up the bank feeds feature, and then you can scroll through the expenses to make sure that you have recorded all of your allowable expenses in the system.

Review your financials

In order to run a successful rental business, you need to know your numbers like the back of your hand. With a system like Landlord Studio, you can easily analyze your financials by printing reports and reviewing your dashboard regularly.

Doing this ensures that your properties are cash flowing positive and that you don’t have unexpected expenditures burning through your cash reserves.

By managing your property financials in this fashion, and regularly, running through this financial accounting cycle. You will be able to keep accurate, up-to-date books with all of the relevant documentation stored securely in a cloud server so that you can access it at any time. When the end of the tax year comes around. All you need to do is run a Schedule E report and a Profit and Loss report through Landlord Studio and you’re done.

5 Things To Look For In Property Accounting Software

Selecting the right property accounting software for you can be a challenge. Landlords need software that suits their particular needs which is dependent on the size of your portfolio, and your future financial goals.

One software that people often use is QuickBooks for rentals, however, using QuickBooks for rentals can be a challenge to set up and use on a day to day basis (unless you are very familiar, and potentially trained with the product). Additionally, depending on the plan you need it really isn’t the most cost-efficient solution either. This is why it’s recommended to explore landlord specific property management accounting solutions, such as Landlord Studio.

Key features to look for in a property management accounting software include:

Cloud Accounting

Cloud accounting allows you to manage your income and expenses on the go. This means that you can record expenses at the point of sale, as opposed to leaving them to become a large data entry job at the end of the month, quarter, or even the year. Instead, you can enter expenses as they happen in real-time.

The best cloud accounting software have a native app that you can use on your mobile device, making it incredibly easy to not only enter expenses and income as they happen, but also to run reports, send and receive emails, and more.

Link Your Bank Accounts

Connecting your bank accounts to your property management software will allow you to view and reconcile relevant transactions from inside the software. This means you don’t have to have multiple tabs or windows open on your device (flicking between apps can be especially challenging on mobile). On your mobile app, you will be able to view and reconcile transactions with a few quick taps. Landlord Studio allows you to do this very simply through our integration with Plaid.

Automate Income Transactions

Collecting rent is a major part of being a landlord, your income needs to cover all of your expenses and generate a little extra to make this a feasible business. What you don’t want to be doing is chasing your tenants every single month for that income.

The best property accounting software’s will allow tenants to transfer money directly into your account via ACH transfers. This is secure, fast, and affordable. Additionally, with software like Landlord Studio tenants can log in and set up recurring payments, so that they don’t have to remember every month to make the payment. Instead, the transaction is automatically processed. Then on the landlord side, it is automatically logged in our income tracker.

Having an online rent collection system like this in place also gives greater clarity for both parties as they can both review historical and upcoming payments.

Receipt Scanner and Document Storage

We’ve already mentioned that storing proof of your expenses is vital if you want to be able to claim your expenses. A good property management accounting solution then will offer you the ability to digitize your paper receipts and store them securely in a cloud folder so that you can access them anytime.

With Landlord Studio you can use our smart scan feature to take a picture of the receipt at the point of sale. The software will then automatically read the details of the receipt, enter them for you and save the receipt attached to that expense in the system.

Additionally, with Landlord Studio you can store any important and relevant documents relating to your property, or that specific tenancy.

Financial Analysis

One of the key benefits of having a digital bookkeeping system is the ability to gain a nuanced and detailed oversight of your portfolios financials. With this data, you can identify points of weakness in your rental business and improve your profitability.

Landlord Studio has an easy to use dashboard which shows upcoming expenses, cash flow, collected rent vs expected rent, and your current occupancy. Additionally, we have over 16 professional accountant-approved reports which can be generated instantly from any device and shared via email or downloaded and printed.

One key report for example is our Schedule E report which mirrors the Schedule E 1040 form so that you can simply print it off and copy across the details.

Property Management Accounting: Final Words

The right property accounting software will, very simply, save you time and money. It will allow you to run your rentals like a business without forcing you to spend hours every week managing admin tasks. Choosing landlord specific property management accounting software makes keeping your accounts accurate and up-to-date easier than generic accounting software.

And with software like Landlord Studio you have all of the essential features that you need to not only manage the accounting for your properties with great detail and accuracy but also to manage other areas of your rental business.

For example, with Landlord Studio, you can track maintenance tasks, collect rent, run tenant screening reports, automate tenant communications set important reminders for things like property inspections, and more. And all of it can be done through the app, or via our desktop portal, wherever you are.

* First 3 properties free.

You Might Also Like

• The Complete Guide To Rental Property Taxes
• About The Schedule E Rental Income Tax Form
• How To Change From Spreadsheets To A Modern Property Management System
• 11 Ways Landlords Can Increase Cash Flow With Additional Revenue Streams

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Property Management Accounting Terminology

Accounting Period: An accounting period is a defined span within a financial statement, often spanning days, months, or years. When you generate reports in software like QuickBooks, each report corresponds to an accounting period.

Accounts Payable: Accounts payable refers to the outstanding amounts owed by your business to vendors. This encompasses expenses for products or services essential for your business, such as bills from contractors for property repairs.

Accounts Receivable:Accounts receivable is the opposite of accounts payable. It represents the money owed to your business, including open invoices, unpaid fees, and pending rent payments.

General Ledger: The general ledger (G/L) is a comprehensive record of all business transactions. Basic accounting software often generates this automatically as transactions are inputted.

Bank Reconciliation: Regular reconciliation of transactions through identifies discrepancies and ensures accurate record-keeping.

Asset: An asset signifies valuable possessions owned by the business. This includes properties, cash deposits, land, and accounts receivable.

Revenue: Revenue denotes the earnings generated by your business within a specific period. For instance, rent payments received from tenants or fees from landlords.

Expense: An expense represents costs incurred to operate your rental business, encompassing payroll, collecting rent, vendor payments, marketing, maintenance, and other expenditures.

Overhead: Overhead entails all expenses related to running the business beyond direct service costs. Examples encompass payroll, office rent, utilities, and insurance.

Credit: Credit is a transaction term appearing on the right side of an asset account. Such transactions decrease the respective asset account.

Debit: Debit is the converse of credit, signifying transactions that appear on the left side of an asset account. These transactions increase an asset account.

Depreciation: Depreciation gauges the decline in value of an asset over time. It's crucial for tracking an asset's value and potential tax deductions.

Equity: Equity reflects the ownership value in the business. Eg. Cash invested plus debt paid off. For business owners, equity equals assets minus liabilities.

Gross Profit: Gross profit is revenue minus the cost of goods sold. It quantifies the profit before accounting for all operating expenses.

Net Profit: Net profit subtracts all costs, including operating expenses, from revenue, offering a more comprehensive profitability picture.

Liability: Liability refers to obligations or debts a company owes, such as accounts payable, mortgages, payroll, and loans.

Bookkeeping: Bookkeeping is the process of recording business transactions to create accounting data.

b A financial statement is a report providing insights into a business's financial well-being. Examples include balance sheets, profit and loss statements, and income statements. Specific requirements for lenders or auditors depend on the requested report.