Tracking rental property expenses is an important part of investing in real estate. It’s also one of the least favorite things that most real estate investors want to do.
The good news is that keeping track of the expenses of owning and operating rental property is easy when you use the best modern software specifically built for residential income property investors.
Why It’s Important to Stay Organized
In order to gain the most from your rental property investment, it’s important to report all of your income and expenses as much as you (legally) can. That’s why good record keeping is so important for real estate investors.
According to a post on BiggerPockets, large or vague deductions are one of the top three IRS audit areas every real estate investor needs to know.
Staying organized not only reduces the risk of getting audited. It also makes it easier to track your profitability from one month to the next, and helps ensure that you are taking every tax deduction you’re entitled to at the end of the year:
- If you’re ever audited by the IRS, you’ll have to prove your rental expenses are legitimate. Expenses that can’t be backed up with a receipt or proof of payment will be rejected. The IRS will recalculate your taxes for you, and assess additional taxes, penalties, and interest.
- Keeping detailed records and backup all in one place makes it much easier to accurately track the true financial performance of your rental property and avoids errors when filing a tax return.
- Accurate record-keeping also reduces the risk of overpaying your taxes by not claiming every deduction you’re entitled to as a real estate investor.
Records That Rental Property Owners Need
There are two types of records that owners of rental property need to keep:
- A record of incomes and expenses for each rental property, usually in the form of a P&L (profit & loss) statement.
- Back-up or supporting documents – such as receipts, credit card or bank statements – to prove that the income and expenses on your P&L are accurate and legitimate.
That might sound easy enough. But the truth is it’s easy to become overwhelmed by record keeping. Especially when you consider all of the potential expenses involved, even if you’re just starting out and own a single rental home.
Here are some examples of records to keep:
- Settlement statements, escrow reports, and inspection documents from when you first purchased the property.
- Tenant leases for current and past tenants, including applications and tenant screening reports.
- Tenant-related documents such as commissions paid, maintenance requests and repairs made, and late rent notices sent.
- Proof of rental payments received, the amount, and the date the rent payment was received.
- Bank statements from the property operating account, to show that personal and business funds are not being commingled.
- Copies of expense receipts such as utility bills, material and labor, supplies, and other costs directly related to owning and operating the rental property.
- Invoices from professional service providers such as leasing agents, property management companies, lawyers, and accountants.
- Expenses related to marketing a vacant property for rent, such as online advertising fees, tenant screening reports, and lease preparation costs.
- Mortgage loan documents and a detailed record of loan payments made, including a breakdown of principal, interest, taxes, and insurance (PITI).
- Records of sales or rental tax paid to the city or state for the monthly rent received from each property and tenant.
- Copies of federal, state, and local tax returns going back several years (ask your accountant or CPA what the best practices are for your business.
What is Included in Rental Property Expenses?
Each property expense is called a “line item” on your P&L. Specific line item expenses will differ between property types and real estate investors.
For example, owners of multifamily property with common area parking may have an expense line item for parking lot maintenance. On the other hand, single-family homes often have a driveway or on-street parking, so there isn’t a parking lot to maintain.
Depending on the type of property you have – single-family rental, multifamily, or condo – and the part of the country it’s located in, rental property expenses fall into one of two categories:
Maintenance, Repairs, and Utilities
- Alarm system
- HOA dues
- Pest control
- Snow removal
General Operating Expenses
- Auto and travel expense
- Dues and subscriptions
- Leasing fees
- Mortgage interest
- Office supplies
- Other interest
- Professional services
- Property insurance
- Property management fees
- Property supplies
- Property taxes
- Rental or sales taxes
- Technology and software
In addition to the above expenses, real estate investors are also allowed to claim a depreciation deduction, up to 27.5 years for a residential rental.
Depreciation is a non-cash deduction rental property owners use to reduce taxable net income. For example, if you paid $140,000 for a single-family rental (excluding the value of the lot), you could take a depreciation deduction of $5,090.91 ($140,000 / 27.5 years) plus all of the other tax-deductible expenses above.
How to Track Rental Property Expenses
There are a number of online software programs a real estate investor can use to track rental property expenses.
Some examples include a basic Excel spreadsheet from Zillow, personal and business accounting software programs like Quicken and TurboTax, and property management systems such as Cozy and TenantCloud.
However, the most successful investors use Stessa to track their real estate investments. That’s because Stessa is an asset management system designed by real estate investors for real estate investors. The company has been featured in publications such as BiggerPockets, Forbes, The New York Times, The Wall Street Journal, and Inman.
Stessa’s rental property asset management software solution for landlords works across an entire portfolio of rental properties, from one single-family rental home to dozens of homes, multifamily assets, and short-term rentals.
What Stessa Does
Stessa is a cloud-based asset management system that makes tracking real estate investments simple.
Real estate investors can access their Stessa dashboard from any computing device, including a desktop or laptop, tablet, or smartphone app from both Google Play and the App Store:
- Track unlimited properties.
- Use performance dashboards at both the property and portfolio levels.
- Automatically track income and expenses with a paper trail.
- Upload, organize, and store all real estate documents including expense receipts, leases, and inspection reports.
- Run unlimited monthly financial reports including P&L income statements, net cash flow, and capital expenses.
- Export tax-ready financials to simplify filing at tax time with software from the Stessa Tax Center.
- Access your portfolio from anywhere in the world with an internet connection.
- Collaborate with business partners, fellow investors, family and friends.
- Track and upload expenses on-the-go with iOS and Android apps.
- Get valuable resources to help scale up and optimize your rental property portfolio.
- Access the latest real estate news and trends that help investors stay on top of their game.
Security is also a top priority at Stessa. The software uses the industry’s best security encryption and robust multi-factor authentication to make sure that your private information remains private. Information is never shared without your permission.
How Stessa Works
You can set up a property in Stessa and start tracking your real estate investments in five easy steps:
- Sign up for Stessa with your email address
- Enter your property address
- Connect accounts quickly and securely
- Run the reports you need with a single click
- Monitor each property and the entire portfolio from your dashboard
In just 5 minutes you’re good to go.
Begin using Stessa to track rental performance to maximize your revenue based on your unique portfolio and investment strategy. Automate income and expense tracking with intuitive features that auto-categorize transactions for easy reporting and tax preparation.
By having all of your finances and documents in one place, you’ll be able to manage and grow your portfolio with confidence.
Let’s take a look at what your personal dashboard on Stessa and reports will look like:
Sample Income Statement
Sample Net Cash Flow Report
Stessa is 100% Free
Stessa’s goal is to provide powerful tools for managing rental property to investors at the lowest possible cost, which is why the system is absolutely free to use. Stessa does offer optional, premium services such as rent comps analysis, mortgage financing, and market research.
Final Thoughts on Tracking Expenses
Expenses can take a big bite out of the rental income you receive for owning and operating a rental property.
Even if you own just one rental home, it’s easy to get quickly overwhelmed by keeping documents and receipts organized to make sure that something doesn’t fall through the cracks. Misreporting expenses can have a significant impact on your NOI, cash flow, and overall rate of return. Not to mention the increased risk of getting audited by the IRS.
Fortunately, tracking your rental property expenses is very straightforward and easy to do without having to use an expensive, complicated accounting package or a property management system that gives you more than you’ll ever use.