Real estate bookkeeping usually isn’t the first thing investors think of when investing in property, but it’s an important part of owning and managing rental property. With good bookkeeping, an investor can better identify opportunities to increase rental income, reduce expenses without affecting property value, and better track owner’s equity.
In this article, we’ll explain how bookkeeping in a real estate business works, the benefits of using an automated bookkeeping system, and offer tips to get the most out of a real estate bookkeeping system.
- Real estate bookkeeping tracks money moving in and out of the business.
- Most investors use the cash system of accounting by reporting income when it is received and recording expenses when they are paid.
- A good real estate bookkeeping system can help investors identify opportunities to maximize revenues, reduce expenses, and accurately monitor owner’s equity.
- Three main bookkeeping solutions for real estate investors are manual spreadsheets, off-the-shelf software, and real estate bookkeeping software specifically developed for rental property owners.
What is Real Estate Bookkeeping?
Real estate bookkeeping records business expenses and income, along with keeping track of assets and liabilities.
According to IRS Topic No. 414 Rental Income and Expenses, most real estate investors operate on cash basis accounting. That means rental income is counted when it is actually received, and expenses are deducted when they are paid.
Transactions that are a part of bookkeeping for real estate investors include:
- Rent invoices sent to a tenant
- Receipt of the monthly rent
- Charging late fees to a tenant for unpaid rent
- Posting the tenant security deposit to the balance sheet
- Paying vendor invoices
- Making the monthly mortgage payment
- Apportioning monies to interest and principal loan balance
- Paying property tax
- Sending payments to the property Home Owners’ Association (HOA)
- Reconciling monthly financial statements
- Correctly classifying payments as deductible or capitalized expenses
- Properly tracking accrued depreciation on the real estate balance sheet
- Accurately reporting owner’s equity
Bookkeeping systems for real estate can be manual, such as a simple spreadsheet created for a property, or automated by using a rental property accounting system like Stessa that automatically tracks income and expenses.
How a Transaction is Posted
Income and expenses should be posted on the date that the transaction occurs, along with reference information to make it easier to assign the entries to the right category. For example, a rent receipt in a real estate bookkeeping system normally includes:
- Name of tenant and address
- Amount of rent received
- Payment method (such as online rent payment vs. check in the mail)
- Rent payment period (for example, July 1st – July 31st)
- Remaining balance due (if any, including any late fees)
A good real estate bookkeeping system automatically creates a paper trail so that if an investor is ever selected for a tax audit, back up information to verify all income and expenses can easily be found.
Real Estate Financial Reports
Transactions entered into a bookkeeping system for rental property are used to generate various real estate financial reports at both a property and portfolio level, such as:
- Income (profit & loss) statement
- Net cash flow report (including financing activity and capital expenses)
- Balance sheet
- Capital expense statement
- Rent roll
- Bank reconciliation
Reports created from a real estate bookkeeping system can also be generated based on a specific date range, such as monthly, year-end, or trailing 12 months.
Real Estate Bookkeeping Solutions
There are three general bookkeeping solutions that real estate investors use:
Programs like Excel, Numbers, Google Sheets, and OpenOffice can be used to create a basic real estate bookkeeping system to track income and expenses. However, even with one rental property, keeping information updated manually can become tedious and it’s easy to have something fall through the cracks.
Generic Real Estate Accounting Software
Generic, off-the-shelf software solutions are used by millions of people worldwide, but aren’t specifically designed for rental property bookkeeping. Programs like QuickBooks Online and Quicken can be good matches for investors who understand accounting and are willing to spend time customizing the software to meet their needs.
Real Estate-Specific Software
Real estate-specific software, like Stessa, is specifically designed to help both novice and sophisticated investors make informed decisions about their rental property.
After signing up for a free account and entering basic property and banking information, Stessa begins automatically tracking income and expenses. There’s little learning curve because the system uses intuitive features to auto-categorize charges to the correct accounts.
Why Real Estate Investors Need to Know Bookkeeping
A good real estate bookkeeping system helps an investor to pay attention to three main aspects of the rental property business that affect the bottom line:
Income and Maximizing Revenue
Many real estate investors overlook opportunities to increase income by mistakenly assuming the rent is what it is. In fact, there are a number of ways to potentially maximize revenues in a single-family home or multifamily building:
- Minimize lost income due to vacancy by proactively renewing tenant leases.
- Charge a fair market rent by running rent comparables before renewing a lease using online services such as Stessa Rent Estimate.
- Use an online rental listing service to reach as many qualified tenants as quickly as possible.
- Add a coin-operated laundry or offer appliance rentals to tenants who don’t have their own washer, dryer, or refrigerator.
- Make the rental property pet-friendly and collect a monthly pet rent.
- Let a new tenant move in early by pro rating the first month of rent.
- Include an optional lease termination fee in the rental contract as an alternative to trying to collect past due rent if a tenant breaks the lease.
- Collect extra occupant or roommate rent if an additional person moves in after the lease is signed.
Expenses and Control of Spending
Every penny saved on expenses helps to increase net operating income and property value. If the rental property is located in a market where cap rates are 6%, saving just $10 per month can increase property value by $2,000 ($120 per year / 6% = $2,000).
A bookkeeping system for real estate itemizes each expense, making it much easier for an investor to identify opportunities to save money with a rental property. For example, after reviewing itemized expenses, an investor may wish to:
- Verify that the property management company is passing through any preferred pricing discounts received on repair and maintenance services.
- Shop around for a landlord insurance policy and ask the current carrier about insurance discounts for having multiple policies.
- Perform preventative maintenance, such as seasonal heating and air conditioning service on a routine basis to help avoid major and costly repairs.
- Investigate in a good tenant screening service to avoid renting to a bad tenant and have the prospective tenant pay the application fee.
- Incorporate more energy efficient appliances and devices, such as smart thermostats and long-lasting LED lights, to save money on landlord-paid utility expenses.
Monitor Owner’s Equity
One of the best things about using Stessa to manage rental property finances is that the real estate balance sheet updates in real time. Having an accurate calculation of owner’s equity can help an investor to decide when the time is right to refinance a rental property mortgage.
Most balance sheets carry the asset value of a rental property at the original cost. Over the years, houses tend to increase in value due to appreciation, so carrying the property at the purchase price understates the true amount of owner’s equity.
By contrast, Stessa updates the value of a property by periodically marking the price to market.
For example, three years ago the value of a home in Jacksonville, Florida was $184,000 according to Zillow. Today, home values there have increased to $236,000 (as of June 2021). While a static balance sheet would still record the home value at $184K, an investor using Stessa could easily see that the owner’s equity has increased by about $52,000.
That extra money created by property appreciation could be accessed via a home equity loan or a cash out refinance and used as a down payment to buy an additional rental property. A good real estate bookkeeping system makes opportunities like these easier to see.
Real Estate Bookkeeping Tips for Investors
Even the best real estate bookkeeping software is only as good as the information that goes into it. Some best bookkeeping practices for real estate investors include:
- Open a business bank account to keep personal and business income and expenses separate.
- Keep copies of all receipts by using a safe and secure online storage system to organize all real estate documents.
- Maximize tax deductions by categorizing income and expenses the same way that the IRS does on Schedule E.
- Reconcile bank accounts monthly to double check that transactions recorded by the bank match those shown in the real estate bookkeeping system.
- Review financial reports, such as income statements, net cash flow, and capital expense reports to monitor property performance and make better real estate investment decisions.
- Understand key rental property financial performance metrics such as cash flow, net operating income (NOI), capitalization rate, and cash on cash return.
- Make the most of technology by using real estate bookkeeping software like Stessa to help maximize profits through automated income and expense tracking and smart money management.