To be a successful landlord — and one that tenants want to keep renting from — you need to successfully manage the financial aspects of renting out a property.
That means collecting rent and deposits and keeping track of funds you’ve received, but it also includes processing invoices related to your rental property in a timely fashion, so that repairs and maintenance can get done. It means tracking your tax-deductible business expenses, and it means keeping your rental business finances separate from your personal finances.
A well-thought-out approach to property management accounting is what you need. You don’t have to be an accountant to keep accurate ledgers and books, but it can help to hire one for monthly reconciliations, or at least for filing taxes and performing audits. If you’re going to tackle property management accounting yourself, you’re going to need a solid property management accounting software tool, as well as a business bank account or credit card for each of your properties — and a limited liability company (LLC) to protect your personal assets from business liability.
Get the Right Software Tool
Plenty of beginning landlords don’t use a special property management accounting software tool to manage their business finances — and it’s true that a simple spreadsheet and a single-entry accounting method may be sufficient if you’re only managing one property. Once you get into managing multiple properties, however, you need a robust property management accounting software to streamline your accounting processes.
Property management accounting software can make it easy to populate your ledgers with cash payments and expenses, because it can sync with your bank account and detect transactions that need to go into your books. For example, when tenants pay their rent via ACH, your accounting software will detect those deposits and populate them into your accounting ledgers.
Decide on Your Accounting Method
Many small business owners use the cash basis method of accounting, in which transactions are entered into the books as soon as they occur. So, if a tenant gives you two months’ rent in advance, for a total of $5,000, you would write down that $5,000 in your ledger on the day you received it.
However, the cash basis method of accounting can fall short when you’re managing multiple properties. The accrual method, in which you enter transactions in your ledger when they should occur regardless of whether they have not yet or have already occurred, can make it easier to manage finances for multiple properties. In some states, you’re even required to use the accrual method of accounting if you’re a landlord.
Set Up Your Business Structure
As a landlord, you’re exposed to too much liability to operate as a sole proprietor. You need to set up an LLC to protect your personal assets in the event that you are sued by one of your tenants. If you stay in the landlording business long enough, you’re just about guaranteed to see some tenants in court, so having your rental properties under an LLC is not negotiable.
Open an Account for Each One of Your Properties
Each one of your properties should form its own entity in your ledgers, and you should have a separate bank account or business credit card (or both) for dealing with the expenses of each of your properties. Having a separate account for each property helps you keep track of your expenses more easily, because you can just go through your statements every month for expenditures and deposits. Your accounting software may even detect your transactions and automatically populate them into your books.
Create Your Ledgers
Each one of your rental properties should have its own set of ledgers. When you’re managing multiple properties, it’s a good idea to do double-entry accounting instead of single-entry, because double-entry can accommodate more complex bookkeeping tasks. Each property needs a general ledger, which includes all transactions relating to that property, and a chart of accounts, which can both help you clarify how you’re categorizing expenditures and payments in your ledger, and help you remember those categorizations for the future.
You also need a rent roll, which should include rental payment data for all of your properties in the same document. A rent roll is simply a chart which lays out which properties you have in your portfolio and when rent has been paid for each one. It can make it easy to see at a glance which of your tenants is late on rent or paid in advance.
Do Your Bookkeeping
Each month, you should go through a complete accounting cycle with your ledgers. Start by collecting your rents and noting them down in your ledgers — if you can get your tenants to pay their rents via ACH wire transfer, your accounting software should be able to sync with your accounts to detect those payments and automatically enter them in your ledgers. You’ll then need to process your invoices for each property each month — these can include bills for utilities that you pay for, as well as invoices for landscaping, repairs and maintenance, updates, and so on. Choose a property management accounting software that gives you the option to print paper checks when you need them.
Make sure you reconcile each balance sheet with the associated bank accounts each month. Your assets should equal your liabilities and expenses. If you’re spending more than you earn during a particular period, you should be able to cover it out of your reserve fund.
Your success as a landlord is directly tied to your ability to keep correct and complete accounts of your business dealings. The right software can take a lot of the legwork out of bookkeeping, so you can spend more time on what you do best — keeping your tenants happy.