Having a rental property chart of accounts is a key component of managing the financial performance of any real estate investment and making better investment decisions.
The general concepts for setting up a chart of accounts are the same for all types of rental property, including single-family rental homes, small multifamily buildings, short-term rentals, and self-managed rental property.
- A rental property chart of accounts is used to accurately track every financial transaction, streamline financial reporting and tax filing, and to make better investing decisions.
- The IRS Schedule E is often used as a guideline for creating a rental property chart of accounts.
- The main categories of a rental property chart of accounts are revenues, expenses, assets, liabilities, and owner’s equity.
- A chart of accounts often has sub-accounts for each category to provide income and expense information in more detail.
What is a rental property chart of accounts?
A rental property chart of accounts provides the groundwork for keeping track of every financial record related to a rental property.
Having a good rental property chart of accounts right from the start helps real estate investors to clearly view the financial performance of a rental property:
- Creates a structure or filing system for putting every financial transaction in its associated account.
- Streamlines financial reporting and tax filing.
- Simplifies information sharing with rental property stakeholders such as business partners, lenders, accountants, and property managers.
- Serves as a guide to help real estate investors make better decisions regarding the rental property and future investments.
A rental property chart of accounts is divided into five main sections and associated sub-accounts:
- Revenues: Money received for use or occupation of the property, including rent from tenants, late fees, and additional rent from pets or appliance rent.
- Expenses: Operating expenses such as property management and leasing fees, repairs and maintenance, insurance and property taxes, HOA fees, and interest expense.
- Assets: Real estate owned, cash on hand, checking and savings accounts, security deposit trust account, and capital reserve account.
- Liabilities: Refundable tenant security deposit, outstanding mortgage balance, credit card balance, personal loan made by an investor to fund operating expenses or utility deposits.
- Owner’s Equity: Value of the rental property in excess of the mortgage balance, other funds invested in the business.
While there is no standard format, each section of a rental property chart of accounts is usually divided into several sub-accounts to provide investors with financial information on a more granular level.
For example, the asset account may contain sub-accounts for building value, land value, improvements, accumulated depreciation, along with checking, savings, and trust account balances.
How to create a rental property chart of accounts
Rental property asset management software like Stessa that is specifically designed for real estate investors uses IRS Schedule E (Form 1040) as a starting point for creating a rental property chart of accounts.
The first two categories of the chart of accounts – revenue and expenses – are used to provide the income and expense information needed to file Schedule E. Revenue and expenses transactions in the chart of accounts are also used to generate regular rental property financial reports such as the income statement, net cash flow, and capital expenses reports.
The remaining three categories – assets, liabilities, and owner’s equity – are used to create the rental property balance sheet. Although investors are not required to provide the IRS with the property balance sheet, creating and regularly reviewing the balance sheet is important.
A good balance sheet for a rental property makes it easier to keep track of tenant security deposits and annual depreciation expenses.
The rental property balance sheet from Stessa also automatically updates property market values and outstanding mortgage balances. Viewing information in real-time provides investors with a more accurate idea of owner’s equity and the current loan-to-value (LTV) of every rental property in the real estate portfolio.
Although Schedule E only has one line item for rental income, in reality most real estate investors receive multiple types of revenue. Common types of rental income include:
- Monthly tenant rent
- Prepaid rent such as first and last month of rent collected by a landlord
- Other rent such as roommate, pet, and appliance rent
- Additional income from laundry room and parking fees (often with small multifamily property)
- Cancelation fees for the early termination of a lease
- Application fees paid by a prospective tenant
- Utility payments passed through to a tenant (such as water, sewer, and trash with a small multifamily property)
- Refundable security deposit withheld by the landlord to pay for damage or outstanding rent owed by the tenant
There are 15 expense line items on Schedule E to account for common rental property operating expenses:
- Auto and travel (business related)
- Cleaning and maintenance
- Legal and other professional fees
- Management fees
- Mortgage interest paid to banks
- Other interest
- Taxes (such as property tax)
- Utilities (paid directly by the landlord)
- Depreciation expense
- Other expenses
However, a rental property chart of accounts may create sub-accounts for each expense line item.
For example, instead of recording all repair costs as one lump sum, many investors create repair and maintenance sub-accounts such as landscaping, pest control, HVAC maintenance and repair, and interior and exterior painting.
By having expenses detailed on the chart of accounts, investors may be able to gain keener insights on ways to reduce operating expenses and increase cash flow.
Asset accounts on a rental property chart of accounts consist of bank accounts, refundable deposits paid by a landlord to open a utility account, price of the rental property, and accumulated depreciation.
Business bank accounts: Most real estate investors open one or more business bank accounts to avoid commingling business funds with personal funds, and to make keeping track of rental property income and expenses easier. Common business bank accounts may include a checking account, a savings account used to allocate funds for future capital repairs, and a trust account used to hold tenant security deposits.
Rental property: The rental property asset account records the original purchase price of the property, and is generally broken down into sub-accounts – such as building value, land value, and improvements – to simplify recording depreciation expense.
For example, residential rental property is depreciated over a period of 27.5 years, land is not depreciated because it does not wear out, and improvements such as carpeting and appliances are depreciated over 5 years.
Accumulated depreciation: This special account is created to record accumulated depreciation over time, providing an investor with a better idea of the original asset value, accumulated depreciation, and the net asset value of the rental property.
Knowing the amount of accumulated depreciation also gives an investor a better understanding of the potential tax liability when the rental property is sold. The amount of depreciation claimed as an expense is “recaptured” when the property is sold and taxed as ordinary income to the investor, up to a maximum tax rate of 25%.
Liability accounts on a rental property chart of accounts show the amount of debt at a given point in time. Common liability accounts with a rental property include:
Refundable tenant security deposits
A security deposit meant to be returned to the tenant when the lease ends is recorded as a liability. However, if part or all of the security deposit is used to pay for damage caused by the tenant or unpaid rent, the deposit is re-recorded as revenue.
Mortgage on the rental property
The rental property balance sheet from Stessa can sync with an investor’s mortgage account, allowing the outstanding mortgage balance on a rental property to be updated in real time.
Credit card balance
Sometimes real estate investors use a business credit card as a short-term funding source for purchasing supplies, or to pay for a capital expense such as replacing the heating and cooling system. Other times, investors will take advantage of a 0% or low interest rate promotion to make property purchases, then pay off the balance due when the credit card interest rate rises.
Home equity line of credit
Also known as a HELOC, a line of credit against the equity in a rental property provides an investor with a source of funds when and if they are needed. Although HELOCs are sometimes challenging to obtain, lenders generally place few if any restrictions on how a HELOC can be used. When the line of credit is drawn down by an investor, the balance due is recorded as a liability, while interest on a HELOC is recorded as an operating expense.
Owner’s equity account
Owner’s equity in a rental property is calculated by subtracting the total liabilities from the total assets shown on a rental property chart of accounts. Here’s a simple example of how to calculate owner’s equity in a rental property:
- Business bank accounts: $5,000
- Rental property: $150,000
Total Assets: $155,000
- Tenant security deposit: -$1,500
- Mortgage balance: -$110,000
Total Liabilities: -$111,500
Owner’s Equity: $43,500 (Assets – Liabilities)
Where to find a rental property chart of accounts template
Off-the-shelf financial software such as Quicken, QuickBooks, and FreshBooks all have a generic chart of accounts that can be customized for a rental property. There are also plenty of how-to videos on YouTube that explain how to set up a chart of accounts for rental property.
However, another way to find a rental property chart of accounts is to sign up for a free account with Stessa. Stessa was designed by real estate investors for real estate investors, which eliminates the guess-work of setting up a chart of accounts, because the work has already been done.
Simply enter some basic information on the rental property, link the business banking and mortgage accounts, and have revenues and expenses automatically recorded to the correct line items on the rental property chart of accounts.