Maintaining accurate accounting records is sometimes thought of as a secondary responsibility of owning rental properties but understanding the accounting process is essential to your success (even if you have an accountant to help you out).
Not only does it enable you to take advantage of tax benefits offered by the IRS, but it also ensures you are making strategic, data-informed decisions about your investment properties.
As a property management company, we maintain detailed accounting records for all our clients and provide monthly statements and annual reports for their review and tax use. We monitor accounting data regularly and find it particularly insightful for:
- Comparing profitability and performance among properties
- Evaluating revenue streams and expenses
- Staying on top of any potential errors or oversights so we can correct them early
- Monitoring P&L statements, planning for future investments and adjusting capital expenditure contributions as needed.
You should have a strong understanding of the income and expense categories for your rental properties to be successful with your investment.
Income categories will typically include rent, any associated fees (late fees, pet fees, parking fees, etc), and other income tenants pay as part of their lease agreement. Security deposits may fall into the income category if damages are incurred, as they wouldn’t then get refunded to the tenant.
The expense list is typically longer than the income list. Expenses include:
- Capital spending on things like appliances, furnaces, air conditioners and other major expense items that need to be replaced
- Ongoing maintenance and repairs
- Turnover expenses
- Any utility expenses the tenant is not responsible for
- Property management fees
- Professional service or legal fees to cover evictions, tenant disputes or services rendered by an accountant
- Property taxes, insurance, mortgage payments
Part of your accounting processes should also factor in an anticipated vacancy loss, which is on average around 4-8%.
Rental property profits or losses are reported on Schedule E (Form 1040). You can learn more about it on the IRS website. If you have questions about rental property accounting, contact your accountant or give us a call at RL Property Management to learn more about investing in real estate in Columbus.