Investing in rental property is a great way to make extra money on top of your regular job and business. It can give you peace of mind knowing that you have a backup source of income. You can also easily grow your rental business as you can have the option to rent your property on a short or long-term basis.
When you have established your business and earned income, you now have a regular cash flow. At the same time, you also have expenses. With all this money flowing in and out of your rental business, you must keep track of your business's growth while following rental laws by creating a bookkeeping system for your income and expenses.
This method of having a book of accounts for your business is called rental property accounting, and it is different from the standard accounting that most of us know.
Rental property accounting is a method for managing residential rental properties. It consists of overseeing the financial operations of your rental business, including the various tasks and processes.
Sounds too complicated? Don’t stress it since we are here to help!
In this article, we will explain the step-by-step process of doing rental property accounting for your rental home business.
Step 1. Make a Separate Account for Your Business
You might want to put all of your rental income into your personal account, but it’s a big no-no when you’re doing rental property accounting for your business. Whether you only have one or several rental properties, you will need to open a different bank account for each of them.
Opening a bank account is easy and inexpensive, so use it to separate your properties' finances.
This will help you differentiate your personal and business funds, making it easier to manage your finances and comply with tax laws. You can also smoothly monitor how each of your properties is doing financially, making it easier to make smart decisions about your rental properties.
Step 2. Choose the Rental Property Accounting Method You Would Like to Use
Before you choose which rental property accounting method to use, you should consider your accounting needs, the size and complexity of your rental property business, and the type of property you own.
According to the IRS, there are two types of rental property accounting methods that you can use:
Cash Accounting Method
This method directly records your income and expenses. This is a good choice for a small rental home business since it typically handles simple financial transactions. Rental payments are recorded as soon as they are received, and expenses are recorded as quickly as they are paid.
Accrual Accounting Method
This keeps track of income and expenses as they happen, not when the money is received or paid. This means that this method records every income and expense incurred in your business, including transactions that will be obtained later. This type of process will be a better option if you prefer one that will give you an accurate picture of your rental property business performance and financial condition.
Overall, both cash accounting and accrual accounting have advantages and disadvantages, so it's important to know which rental property accounting method is best for your business.
Step 3. Set Up Your Chart of Accounts
With your business accounts and accounting method in place, it's time to create your chart of accounts, which will set your business foundation.
If you’re not familiar with this, your chart of accounts is simply a list of all the financial accounts that your business uses. To give you some ideas, here are some common financial accounts that you can include in your list:
Communication and technology expenses
Cost of sales expenses,
Insurance expenses
Interest revenue
Occupancy expenses
Professional services expenses
Rent or desk fee expenses
Residential income
Salaries and wages expenses
Sales revenue
Step 4. Record All Your Rental Income
As a landlord, tracking all the income that you receive from your tenants when doing your rental property accounting is essential.
You can do this by making a rent roll, a spreadsheet that tracks the rental income you get from each of your properties and its renters. Make sure to include information such as tenant names, rental amounts, lease terms, and payment history. This will let you easily monitor rent payments and check if anyone is falling behind on their due dates.
Step 5. Keep a Record of Your Expenses
For accurate tax reports, keeping track of your expenses is a big part of rental property accounting. Don't forget to include the repair costs, property maintenance, insurance payments, property taxes, utilities, deductible expenses, and anything else that comes up while managing your properties. Sort each of them correctly to have an accurate financial reporting,
Doing this will help you monitor your rental property’s performance and prevent damage to your business.
Step 6. Identify and Include Suitable Depreciation Methods
When you figure out how much your assets are worth over time, you must consider how they are slowly losing value. When you file your taxes each year, you may be able to write off some of this amount. That's why you should keep track of the actual depreciation number of your assets.
Step 7. Do Bank Reconciliations
You must ensure that your business's bank statements and general sheet match. This will help you find any discrepancies or transactions missing from your records.
Step 8. Comply with Tax Laws and Regulations
Aside from keeping yourself updated with the latest state rental laws, learning about the tax requirements that apply to rental homes is also essential. It would also be helpful to hire a professional accountant or tax expert to assist you in your taxes yearly. Through their help, you can ensure that you comply with tax laws while maximizing your tax strategies through deductibles.
Step 9. Use Rental Property Accounting Software and Tools
Spreadsheets are suitable for keeping track of your finances, but you can run your business more conveniently using rental property accounting software and tools. You can use them to automate your rent collection and invoice payments and to track your income, expenses, and financial reports smoothly.
An All-In-One Professional Assistant for Your Rental Business!
Rental property accounting is an integral part of successfully managing your rental homes. Keeping accurate records of your income and expenses is essential whether you're a seasoned landlord or just starting a real estate business.
But we know how complicated it is when you have to do all the accounting work! Fortunately, we at HBR Rentals offer comprehensive financial reporting to make your rental property accounting easier while smoothly monitoring your investment.
We use a fully automated web-based accounting system that eliminates the trouble of manually tracking your business. All you have to do is log in to our Owner’s Portal, and you can instantly check or download your owner statements, income reports, and more!
Hire us now, and let us do the accounting work for you!
