Avoid These Common Rental Property Bookkeeping Errors

Feeling like your profits aren’t what you projected? Dragging your feet when it comes time to reconcile your books? Stressing relentlessly over tax season? You may have a bookkeeping problem.

Many landlords and property managers—both experienced and new—struggle with their rental property bookkeeping. With so many complexities, it’s easy to make a few seemingly insignificant errors. But as those errors grow, your profit shrinks. Below, we’ll discuss some of the most common bookkeeping errors for landlords managing rental properties and how to avoid them.

#1 Commingling of Funds

If you’re a landlord with a smaller number of properties, you may be thinking that it’s not necessary to create a separate bank account for your business. We’re here to tell you that yes, it absolutely is! Though it may seem inconvenient at first, having separate bank accounts for the personal and the business side of your life is a no-brainer. It will:

1. Protect your personal assets. If you find yourself in any escalated legal disputes, having your personal and business assets separate from each other will aid your case. If your business account were to be frozen, for instance, your personal assets would still be secured and available. It’s a worst-case scenario for most real estate investors, but an important one to prepare for. Should you find yourself liable in a legal dispute, you don’t want to risk both personal and professional losses.
2. Simplify your accounting. With separate bank accounts, you won’t have to spend hours painstakingly deliberating whether an expense from months ago was a personal or professional one. All of your transactions including rental income and expenses will already be separated by category, which will save you loads of time and stress. Separate banking accounts is one of the most fundamental rental property accounting basics, and it really does simplify income and expense tracking for your business by leaps and bounds.
3.  Solidify your professionalism. Aside from convenience, having a separate bank account will cement your business as a separate entity from yourself. Your business will be more professional—plus it will look better on paper if you’re seeking partners or lenders. Having a separate bank account for your rental property income can prove to lenders that you take your business seriously, in addition to making it easier to showcase your earnings and profitability.

#2 Overlooking Tax Write-offs

It’s typical for landlords to hear the word “taxes” and feel immediate stress. The world of business taxes can be a very daunting one, but the closer you look, the less stress-inducing it really is. Did you know that everyday operating expenses can become significant tax write-offs? In fact, many expenses can.

It’s important to be educated in the realm of expenses and tax deductions, as certain tax benefits add up fast and can reduce your taxable income by a few thousand dollars. By reporting qualified expenses on Schedule E (the IRS form used to report rental income and expenses), rental property owners can essentially subtract them from their net income for the fiscal year in order to receive a significantly lower taxable income. Here are two common types of expenses that lead to tax savings:

1. Operating expenses — Day-to-day expenses associated with running your business (repairs, insurance, supplies, etc.) that will “run out” or will need to be purchased again in the next fiscal year are referred to as operating expenses. These are typically deductible in the year they’re incurred.
2. Capital expenses — Any improvements made to your rental property that are meant to increase its value are known as (or CapEx). These expenses can vary from new appliances to building improvements to equipment like vacuum cleaners. Although capital expenses cannot be deducted from your taxable income in the fiscal year they are incurred, they are depreciated slowly over time.  They’re easy to get confused with operating expenses, so don’t be afraid to ask a qualified professional or to do some research on your own.

If you have questions about specific rental property expenses and where they fit, seek professional advice from a CPA (Certified Public Accountant), do further research, or refer to the IRS’s documentation for more help.

#3 Procrastinating

It can be easy to put off updating your books if you dread it, but resist the urge! Procrastinating will only leave you with a pile of receipts to fumble through at the last second, which significantly increases the chance of error and can be a huge stressor. Instead:

1. Track transactions daily. Update your books the same day of each transaction and file any physical receipts away in a safe place, especially on the day that rent payments are due. By updating every day, you reduce a few hours of painstaking tracking to a few breezy minutes each day.
2. Automate your bookkeeping. With real estate business accounting software, you can easily track minute details and budget your finances as needed. Utilizing some of the best software for rental property accounting out there avoids human error while saving you valuable time.  It’s worth the research to get set up with one of the many available rental property accounting apps or software platforms.

#4 Inaccurate Record-Keeping

If you think a few estimations couldn’t hurt or that rounding a few numbers won’t have an effect on your books, then it is vital that you reevaluate. Inaccurate bookkeeping will not only stunt your business’s growth, but it can also get you into legal trouble with the IRS. It’s important that you:

1. Ensure that each transaction is accurate. Never round numbers or omit transactions. For the most effective bookkeeping, you need the most accurate numbers possible. Ignoring a decimal place could result in hundreds of dollars slipping through the cracks over time.
2. Keep detailed records. Make sure that you have space on your ledger for transaction details and that you keep them very thorough. It’s helpful to track unit numbers for repair expenses and the like, as this can help you to recognize any patterns or problem areas.
3. Save any physical or digital records. Any statements, receipts, bills, etc. that you receive or distribute should be stored somewhere safely. This should be somewhere secure, like a filing cabinet or a password protected folder on your computer. In the event of an audit, you’ll need to provide thorough records, or you may be hit with fees and penalties.

#5 Not Seeking Help

It can be hard to admit when enough is enough. If your current rental property bookkeeping system—whether it’s by hand or by cursor—is causing you more stress than relief, then it may be time to make a change. You don’t have to wait until the end of the fiscal year for a clean slate either; there’s help you can seek today that will help you sleep better tonight. Consider:

1. Hiring a bookkeeper. Seeking a certified professional can be a great (though sometimes costly) way to get your bookkeeping back on track. CPAs specialize in accounting and tax details, so they can be a great way to foster the growth of your business and to get trusted financial advice.
2. Utilizing real estate business accounting software. More landlords make the switch to rental property accounting software each day. Some of the best software for rental property accounting will automate many bookkeeping processes (generating receipts, organizing transactions, etc.) for you, as well as providing a secure place to store and access your data online. Software like Ledgre even offers features such as Schedule E generation and quick data importation. You can link bank accounts and import spreadsheets so that even past transactions are automatically tracked and detailed for you in an instant. Rental property accounting software is often a fast, convenient, and cost-effective option for landlords.

Conclusion

Rental property bookkeeping doesn’t have to be a headache. By avoiding these common bookkeeping errors, you can ensure that it doesn’t become one. Don’t be afraid to seek outside help or to tweak your current system of tracking rental transactions. Making a needed change, though sometimes seemingly inconvenient, will save you time, stress, and money in the end.