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There are property investors that handle administrative tasks like accounting themselves. If you think you can manage your investment portfolio and keep track of expenses or file receipts at the same time, good for you. But other real estate investors don’t enjoy such kinds of tasks.
Keep in mind that having a solid accounting system is crucial to managing your real estate investments and generating returns. Knowing the basics of accounting helps you see the bigger picture of your finances and focus on activities that generate profits. Learn more about the fundamentals of rental property accounting in this blog post.
What is Rental Property Bookkeeping?
Bookkeeping is the activity of keeping records of the financial transactions of an organization or business. Entrepreneurs analyze these records to determine how an organization or enterprise is doing based on its financial performance.
Taking control of your bookkeeping is crucial to maximizing financial performance and safeguarding your business from financial setbacks. In managing property investments, you should know how to handle rent checks, management costs, and maintenance invoices. It’s also crucial to determine financial red flags that consume your profits.
Tips for Having a Solid Rental Property Bookkeeping
A working bookkeeping system is crucial to track your rental business’ financial performance. Here are some tips you should take note of to ensure you have a solid bookkeeping system.
Separate Business and Personal Accounts
Seasoned property investors and accountants consider it a forbidden thing to join their personal and business accounts. It’s difficult to track rental income and expenses if you’re mixing personal and business transactions. Thus, you should open checking and savings accounts exclusively for rental property investments.
Opening a savings account for your rental property business is crucial to prepare for future expenses. There are times when your rental business will experience vacancies, and your savings can help cover much-needed capital expenses.
Open an Account for Each Rental Property
If you own different rental properties, you should have separate accounts for each of them. This approach allows you to differentiate rental income and expenses on a per-property basis. It’s easier to track income and expenditures and file taxes if you own an account for each rental property.
Consider Digitization
Going digital is a must for every rental property owner, especially to make it easier for them to manage accounting and bookkeeping tasks. For example, use accounting software to integrate bookkeeping and financial performance analysis in one device or drive. It’s also crucial to use a scanner to digitize invoices and receipts conveniently.
There are lots of benefits of digitization, such as having a firm grasp of your bookkeeping and accounting tasks. It also enables you to share data and collaborate with your team.
Choose Between Accrual or Cash Method
There are two popular methods of accounting: the accrual and cash methods. The former tracks income and expenses regardless of the cash having been paid or received. The cash method, on the other hand, records income and expenditures as they enter your bank account.
Small rental businesses can use cash accounting because the cash flow is more manageable, and you can determine exactly your income and expenses in cash at any period. For property investors with several rental properties, the accrual method is preferable as it enables you to see the bigger picture of income and expenditures over several periods.
Your choice of either accounting method should be based on what works for your rental business. If you have a preferred method, stick to it and be consistent when tracking your financial transactions.
Learn about Tax Forms
You must know about the different tax forms if you want to manage a rental property business. Bookkeeping will be more efficient and accurate if you have such knowledge. For instance, 1099 and W-9 tax forms are requirements for employees and non-employees that do any work for your property investment.
A 1099 form is required for every non-employee who made more than $600 working for your rental business within a calendar year. A W-9 form records a contractor’s tax identification number and the business type he’s operating. These tax forms are crucial to have during tax time, and you can incur penalties for failing to file your taxes.
In the meantime, you can make do with a brief description of the 1099 and W-9 forms and their purposes. If you want to learn more than a short overview about them, do further research or hire a certified public accountant to help your rental business.
Final Thoughts
Learning the fundamentals of bookkeeping and accounting is essential for every rental property owner. Remember you need to maximize your profits and safeguard your business from financial red flags. Knowing how to keep records of your financial transactions is key to achieving that goal. Invest in a solid accounting system to make the most out of your rental property business.
