Learning how to keep rental property records can seem difficult for first-time landlords. There’s a lot to keep track of, especially if you have multiple units. Below are the top five ways that landlords can easily keep great financial records.
#1: Keep Paper Records for the Past Seven Years
Although moving to digital is all the rage these days, it’s important to keep in mind that using paper records can still come in handy. Storing physical copies of year-end financial statements, tax returns, journals and ledgers, and supporting documents from the last seven years is a way to give yourself peace of mind in case you ever lose access to your digital records.
Also, the IRS recommends keeping physical copies of all these documents in case you undergo an audit and need to refer back to these important statements. Of course, having this information on file through electronic platforms like accounting or property management software is also useful when in the process of an audit. It still is recommended to have another way of accessing this data that is not through technology just in case the unexpected happens.
#2: Keep Itemized Record of All Income and Expenses
Bookkeeping for landlords includes keeping a record of all income and also documenting each expense you incur from your rental properties.
A great way to keep track of income from rent is to maintain a rent roll. A rent roll tracks rent payments that are due as well as tenant lease terms and late fees, giving the landlord an overall picture of expected and past income. When you can see all this information at a glance, it makes it much easier to see where your income is coming from and which of your tenants is paying on time. It’s also crucial that you keep track of all your rental property income since the IRS requires that you disclose that information.
When documenting expenses, keep in mind that the IRS requires landlords to have proof of deducted expenses. Make sure you keep receipts, bills, or cancelled checks in case you undergo an audit and need to provide evidence of your expenses. It’s also helpful to keep documentation of expenses so that you can maximize deductions come tax season.
#3: Use Separate Bank Accounts
Keeping organized when you have multiple rental properties can be difficult. There is a lot of data to keep track of, and when you keep all your funds in one account, it can be challenging to track which properties are doing well or which tenants are not paying their fees on time.
Maintaining great financial records is important for landlords, especially when it comes to audit work to effectively manage their financial records. To explore ways for landlords to keep great financial records and ensure compliance, learn more about Price Bailey audit services by clicking here.
When you have separate bank accounts for each of your rental properties, tracking expenses and income for them becomes much easier. This way, when thinking about where to invest next, you can see what kinds of properties or areas are doing well already, and you can be confident that another property like that will also do well.
Also, when you have separate accounts, tax season is exponentially easier. Even the most seasoned accountants and tax professionals wouldn’t want to deal with one massive bank account for all your properties, so don’t make it harder on them or you. Get separate accounts for each property and watch your finances organize themselves.
Another popular method for rental businesses that have many properties is to have just three accounts. One is a checking account for operating expenses, the second for savings for security deposits, and the third for savings left over (revenue). Try out a couple of these methods to see which one works best for you.
#4: Get Everything in Writing
It’s business 101. Getting a physical signature is the best way to legally enter into a binding contract. Getting signatures on written leases and other formal documents is a great way to ensure that you can defend yourself in the face of a lawsuit.
Make sure you keep copies of communications with tenants and rental payments, too. Anything that proves that your tenant agreed to pay or perform an action should be organized and easily accessible just in case you need evidence to back yourself up in court.
#5: Use Property Management Software
Everything mentioned above can easily be completed through quality property management software. Property management software is created with landlords in mind, so most platforms offer features for each of the day-to-day tasks and responsibilities of running a rental business.
When it comes to accounting, you want to make sure you aren’t committing any silly mistakes. You’re dealing with your own hard-earned income, and a mistake can be costly. When you automate accounting tasks using accounting software for landlords or property management software, the likelihood of mistakenly charging a tenant twice or forgetting to record a transaction are lessened to almost zero.
Make sure you take the time to figure out what kind of software is best for you and for your business. Some cater to larger rental property businesses, while others are suitable for someone with only a few units. Try a few out and see what works best before paying for a subscription. Some, like Innago, are completely free, and they offer most of the accounting capabilities listed above.
Conclusion
Keeping good records doesn’t have to be a chore. Back in the days of paper records, tax season was the thing of nightmares, but with the online tools and platforms we have today, most of the record-keeping and organization is done for you. Take hold of the advantages at your fingertips and make your life easier by following the tips above.
