The main objective of bookkeeping is to have an accurate record of all the money going in and out of your business. Having a rental property requires good bookkeeping skills or having an experienced bookkeeper on staff. When you know how your business is doing at any point in time, you can better manage your business and make informed management decisions regarding your rental properties.
As a new real estate investor, or even a seasoned investor, there are some basic things that are key to having accurate “books” for your business.
- Keep things separate
Bookkeeping and accounting for your real estate business and properties should be 100% separate from your personal expenses. Not only does this make the bookkeeping easier, but from a legal perspective it’s a bad idea to comingle personal funds and business funds, especially if you are using an LLC or other legal entity. So, set up separate accounts for your real estate properties; this includes a separate bank checking account, savings account and credit card.
To clarify, if you have multiple rental properties, you should have separate accounts for each property. Having one set of business accounts for multiple properties or investments can be complicated and confusing.
- Track Receipts
Keeping track of every receipt is very important in bookkeeping, and to designate what each expense was for (like handwrite property name and purpose on each receipt). This will be helpful around tax time to ensure you get all your deductions correct, and it will keep you organized as to where your money is going, and what bills were paid and what bills were not paid. There are software programs available to scan and keep all your receipts electronically.
- Itemize income and expenses
Every dollar that flows in and out of your business must be categorized and tracked. If you are doing this with a software program (I.e. Quickbooks), you will likely enter this information semi-daily as income is received or bills are written. There are many accounting software programs available online on the cloud and can be accessed from any computer. Quickbooks Online (QBO) is a very popular and a user-friendly program to utilize for this purpose.
- Reconcile with your bank account
Your books should match perfectly with what your bank account shows for that property. The purpose of bank reconciliation is to double check everything to make sure your books are accurate. Sometimes banks or businesses make mistakes, and you’ll be charged for things you were not supposed to be charged for. This happens more than you think….
When reconciling with your bank, you should pay attention to the starting and ending balances of your bank account, and they should match to your books when done. Again, software programs like Quickbooks can assist with the monthly bank reconciliation process and make it a lot easier.
- Create accurate reports or statements
If you have successfully entered and reconciled your bank account, you should be able to generate reports and financial statements to determine how well your property is operating. If you are using accounting software, this can be as easy as clicking a button. You can run the income statement/profit-loss statement, and it will show all the income and all the expenses for that property. The reports are generally run monthly to determine if any adjustments need to be made from a cash flow perspective.
Bookkeeping can seem overwhelming at first, but the process becomes routine the more you do it. If you don’t feel comfortable doing it or don’t have the time, consider hiring a bookkeeper to help you make sense of everything. We have an experienced team of professional bookkeepers that would be happy to assist.
You may also want to sit down with a CPA who will be doing your taxes at the end of the year. Make sure they are aware of any changes in your activities during the year, as they can also help determine any tax planning strategies to assist you in saving money on your taxes. We have many experienced CPA’s on staff that would love to help with planning and preparing your annual tax return.
Contact Larry Davidson, CPA at firstname.lastname@example.org for additional guidance.