Basic Tips for Property Management Accounting and Bookkeeping

As a landlord, keeping track of your books is an important responsibility year-round. Establishing a robust accounting system for property management is crucial for tracking income, controlling expenses, and preparing for taxes. Landlord accounting helps you to manage your finances, get a clear picture of the health of your business, and ensure that every transaction is accounted for. With tax season in your sights, though, bookkeeping for real estate businesses becomes an even higher priority.

Taxes can be stressful, especially if you’re not confident that your books are correctly balanced. That’s why we’re here to offer some basic property management accounting tips so you’re not only prepared to file your taxes, but to improve your bookkeeping skills so you’re ready for any situation.

Understanding Key Accounting Concepts

Before we jump into our bookkeeping tips, let's cover a few key accounting terms that you may or may not be familiar with.

• Assets: Properties, cash, and other resources you own.
• Liabilities: Debts, loans, and other financial obligations you owe.
• Equity: The ownership value of a property, calculated by subtracting liabilities from assets.
• Revenue: Income generated by your rental business, including rental income, fees, and other sources.
• Expenses: Costs incurred by your rental business, including maintenance, utilities, and other operational expenses.
• Accounts Payable: Amounts you owe to vendors, suppliers, and other creditors.
• Accounts Receivable: Amounts owed to you by tenants, clients, and other debtors.

By understanding these basic accounting terms, you’ll be better equipped to manage your property management business’s finances and make informed decisions.

Setting Yourself Up for Success with Property Management Accounting: 10 Tips

Now that you understand some key terms, let's talk about how they apply to rental bookkeeping.

Bookkeeping may feel like a daunting task, especially if crunching numbers isn’t one of your best skills. And it may feel like the pressure is on, since income and expense tracking is a fundamental aspect of rental property accounting, helping you catch critical errors and monitor income and expenses. Fortunately, the basics of bookkeeping are highly learnable. Here are some tips to help mitigate bookkeeping stress and set yourself up for success in your rental business:

1. Use separate bank accounts.

Some landlords think the effort of using different bank accounts for personal and business use is unnecessary, but the exact opposite is true. Even if you only oversee a few properties, opening and utilizing separate bank accounts is vital for property management bookkeeping.

By letting all your business and personal transactions sit in one bank account, you open yourself up to potential issues down the line. Let’s say something goes wrong with your rental finances, such as a legal dispute, and you end up with a frozen account. If your rental assets aren’t separated, your entire account would be frozen and you wouldn’t have access to not just your business funds, but personal funds as well. By setting up a new, separate account for all your business needs, you ensure that you have access to other necessary funds.

Additionally, utilizing separate bank accounts for property management makes your finances much easier to manage by eliminating the need to comb through a large pool of transactions to find one specific to your business. Instead of skimming through payments for personal bills or the occasional morning latte, you can find your relevant business transactions all in one place—and nothing else.

2. Organize your general ledger and chart of accounts.

Before you can begin inputting transactions into your ledger, you must create and organize your ledger. This can be done in different ways, including through Excel spreadsheets or accounting software, but the tool you use will serve as the main record-keeping system for your rental business.

You should also create a chart of accounts for your general ledger that includes all your assets, income, business expenses, liability, and equity accounts. These act as the categorizations for your transactions—each transaction is connected to an account with other information attached to it. Then, you can further categorize your income and expenses according to IRS categories to save you time during tax season. Utilizing both tools helps create a foundation for organizing your finances so they’re easy to navigate and understand later.

It’s helpful to be as detailed as possible when creating these categories and setting up your general ledger for use. The more organized you are, the easier it is to locate important financial information and learn about patterns in your spending and income when you need it.

3. Decide between cash and accrual accounting.

Another essential part of property management accounting is learning about and deciding which accounting method you want to use: Cash or accrual. Selecting the right accounting method is crucial as it affects financial tracking and reporting. Both types of accounting have their advantages and disadvantages, so it’s important to understand their differences to choose a method that will work best for you and your business.

Cash accounting is what might come to mind when you first think of accounting: When money enters or leaves your account, like a rent payment or maintenance expense, you input it into your ledger for that date. It’s that easy! The vast majority of landlords use this method.

It’s important to note, however, that businesses that maintain inventory, are large corporations, or have gross receipts exceeding $26 million per year are not eligible for cash accounting and must instead use the accrual method. The accrual method differs by recording transactions in your ledger when they are earned or incurred, potentially before any money actually arrives or leaves your account. So, if a tenant paid rent through an ACH payment that takes several days to process, you would count the payment when the transaction happens instead of when the payment actually processes. This makes accrual accounting more complex, and businesses that use this method rely on accounts payable and accounts receivable to track the status of various payments.

4. Keep your records accurate and up to date.

One of the keys to staying organized with your property management bookkeeping endeavors is to keep your records accurate and up to date. It’s important to keep a ledger that can track information about your rental business finances, but for it to work at its best, it must be updated consistently, and the information must be correct. Consistent upkeep will also help you identify the most deductible expenses at the end of the year, helping you minimize taxable income and maximize tax savings.

This means that transactions should be tracked and imported to your books daily so a transaction never has the chance to slip through the cracks and go missing, and that transactions should be as accurate and detailed as possible. Even one decimal space of difference in a number can unbalance your books quickly and cost you hundreds of dollars.

Despite your dedication to accurate, detailed records, it’s still possible that you’ll find yourself being audited by the IRS. In this case, you’ll need to provide thorough receipts of your income and expenses, which means you should keep receipts (both digital and physical) stored for safekeeping. Think of it as proof or a backup for your ledger, saving you fees or penalties later.

One of the best ways to help manage and automate your accounts is with rental accounting software, which can automatically track transactions and sort them into categories—more on this later.

5. Reconcile your accounts periodically.

Even as the most organized property manager in the business, it’s still possible for mistakes to occur in your books, so it’s crucial to reconcile your accounts periodically to catch and correct these issues.

Reconciliation involves comparing your books to an external source, such as a bank statement, to ensure that each number and transaction match. If they do, congrats! You’ve successfully managed your books for a given period of time. If they don’t match, don’t worry—all you need to do is update the discrepancy in your books to reflect the correct numbers.

Reconciliation is important, no matter your organization skills or the capabilities of your software. Mistakes can and will happen no matter what, and if they’re not addressed and your books become unbalanced, you can eventually run into issues with the IRS. That can be much more costly than the energy it takes to check up on your accounts here and there, so it’s best to reconcile often.

Financial Management and Reporting Tips

In addition to general bookkeeping, many landlords choose to take their tracking a step further by generating basic financial reports. Below are a few tips for getting started with financial reporting in your rental business.

7. Create basic financial statements for your business.

Financial statements are essential for rental and property management businesses to track their financial performance, make informed decisions, and comply with regulatory requirements. Here are a few examples of financial statements for your rental or property management business:

• Income Statement: Also known as a profit and loss statement, this financial statement shows the revenue and expenses of the business over a specific period.
• Balance Sheet: This report provides a snapshot of your business’s assets, liabilities, and equity at a specific point in time.
• Cash Flow Statement: This statement shows the inflows and outflows of cash and cash equivalents over a specific period.

To generate financial reports, you’ll need to:

• Collect financial data from various sources, including bank statements, invoices, and receipts.
• Use accounting software or consult with an accountant to prepare the financial statements.
• Review and analyze the financial statements to identify trends, opportunities, and challenges.

8. Review financials regularly.

Regular financial reviews are crucial for your business to stay on top of its finances, identify areas for improvement, and make better decisions. Here’s how to review financials regularly:

• Schedule regular financial reviews: Set a regular schedule to review financial statements, such as monthly or quarterly.
• Analyze financial performance: Review financial statements to identify trends, opportunities, and challenges.
• Identify areas for improvement: Use financial data to identify areas for cost reduction, revenue growth, and process improvement.
• Make informed decisions: Use financial data to make informed decisions about the property management business, such as investing in new properties or hiring new staff.

Pro Tips for Optimizing Your Property Management Accounting

You’re now equipped with the basics of property management bookkeeping, but there are still more tips you don’t want to miss that can save you money, time, and energy when managing your books. Rental property accounting is crucial for real estate investors in managing their financial performance and maximizing returns from their investments. Let’s take a look at some pro tips for maximizing your bookkeeping experience.

9. Take advantage of available deductible expenses.

Filling out tax forms may seem like your worst nightmare, but if you don’t use them to your advantage, you could miss out on essential write-offs. Landlords are offered tax deductions for many everyday expenses that present you with the opportunity to put some money back into your pockets each tax season.

There are many kinds of deductions landlords may be eligible to use, such as long distance or local travel, home office use, rental losses, interest, operating and capital expenses, and more. If you’ve paid for flights to travel to a rental in a different state, paid interest on a mortgage or vehicle used for your business, or used a room in your home as an office for rental purposes, you may qualify for these deductions that will lower your taxable income.

Different deductions have different requirements for eligibility but have the potential to ultimately save you hundreds of dollars, so be sure to research what write-offs may apply to you or contact a CPA (Certified Public Accountant) with further questions.

10. Utilize accounting software to digitize and automate your accounting.

The ultimate accounting for property management tip is to digitize and automate your books through software. If the work that goes into bookkeeping seems overwhelming for you to handle while managing your units, property management accounting software is a valuable tool built specifically for landlords like you to ease the burden of handling your finances.

Rental accounting software takes the weight off your shoulders by automating much of the work you’d otherwise do by hand. For example, many platforms connect with your bank accounts for automatic transaction tracking as well as automatic categorization of income and expenses. This kind of software can also generate financial reports and help prepare tax documents so your information is ready to be used when tax season rolls around.

At Innago, we partner with rental accounting software to help our users import their Innago data to a user-friendly, affordable accounting solution.

Conclusion

Managing your rental business’ finances is no simple task; however, with the right foundation for bookkeeping, you can ensure that your books stay balanced and accurate at every turn. By following these tips, you’ll be ready to handle accounting for property management with ease.