It’s important to have a system in place to track income and expenses, and assets and liabilities, even for investors who have just one rental property.
Unintentionally underreporting income can lead to penalties and fines in the event of a tax audit, and overlooking a valuable deduction can result in a tax bill that’s higher than necessary. And after all, who wants to pay more taxes than they have to?
In this article, we’ll take a look at Wave Accounting for landlords, and discuss the pros and cons of using the software for rental property.
Rental property accounting software options
There are the four main ways for handling rental property accounting:
Spreadsheet software programs like Microsoft Excel, Numbers, Google Sheets, or OpenOffice are used by tens of millions of people around the world and can be an easy way to set up a rental property accounting system.
One of the nice things about using an electronic spreadsheet is that there are plenty of pre-made templates for a real estate investor to use. Having a worksheet that’s already set up saves the time and trouble of having to do tedious tasks such as creating row and column headings and making sure that each formula is calculating correctly.
There are many rental income and expense worksheets available online, like this one.
While using spreadsheet software for rental property accounting may be the path of least resistance, a worksheet can become less useful as time goes on. Because data has to be manually entered, it’s possible to overlook an expense that could end up being a valuable tax deduction.
Accounting programs such as Stessa, FreshBooks, QuickBooks, or Xero are the next step up for rental property accounting.
With the exception of Stessa, which is specifically designed for real estate investors, these other off-the-shelf accounting software systems will require some initial time and effort to customize for real estate investing. One big advantage is that, in addition to tracking income and expenses, accounting programs also use a balance sheet and automatic double-entry accounting.
For example, when a tenant rent payment is deposited, the checking account balance is increased and the rent receipt is also recorded as rental income on the profit and loss statement (P&L). Most accounting programs can also be connected with a business bank account, so that income and expenses are synced with the software, although it may still be necessary to review transactions and ensure they are being posted to the correct accounts.
In addition to making life easier, financial reports also look much more professional, which can be important when applying for a loan or putting together information for a buyer.
Property management software
Property management software solutions such as Avail and TenantCloud combine rental property accounting with a full suite of tools a landlord can use to manage rental property.
In addition to tracking income and expenses, and assets and liabilities, many property management software systems have features to help a rental property run more smoothly, efficiently, and profitably. There are options for marketing vacancies, screening tenants and signing a lease, collecting rent, and managing maintenance requests entirely online.
Tenant-friendly features like these may help to reduce tenant turnover and increase cash flow, assuming that satisfied tenants will pay their rent on time and take better care of the property if they plan on staying for the long term.
Wave for landlords
Wave Accounting is free accounting software that was launched in 2010. In 2 years, the company surpassed 500,000 customers and it was acquired by H&R Block in 2019. Over the years, Wave has received numerous accolades from organizations like Deloitte and it aims “to enable fearless financial management for small business owners.”
How Wave works
Wave comes with 4 integrated solutions accessed through one account using a single online dashboard:
Wave Accounting helps to easily manage cash flow, track income and expenses, and prepare landlords for tax time. It offers the following features and benefits:
- Tracks unlimited income and expense transactions.
- Connects an unlimited number of bank and credit card accounts.
- Instant updates for invoicing, payments, and payroll.
- Unlimited invoicing and receipt uploads each month.
- Customizable chart of accounts.
- Creates and exports financial reports including P&L and cash flow.
- Runs multiple businesses in one account.
Wave Invoicing is used to send professional looking invoices, overdue reminders, and to accept payments online. The Wave Mobile Invoicing app, available on Android and iOS, creates invoices on the go and includes the following additional features:
- Unlimited invoicing.
- Automatic payment reminders to speed up cash receipts.
- Sends follow up invoices to past due accounts.
- Accepts online payment via credit card and ACH bank payments.
- Creates automatic recurring invoices.
- Knows when an invoice has been viewed.
- Tracks payments, partial payments, and overdue invoices.
Wave Payments allows a customer to pay an invoice instantly by ACH bank payment, credit card, or Apple Pay. Funds are received in as few as 2 days and fees are as low as 1%:
- Customers can instantly pay via secure ACH bank payment, credit card, or Apple Pay.
- Funds are deposited in 2-7 business days depending on how payment is made.
- Credit card fee as low as 2.9% + 30 cents per transaction.
- All major credit cards accepted.
- Bank payments 1% per transaction, with a minimum $1 fee.
- Creates recurring billing with automatic payments.
- Payments received automatically flow into accounting records.
Wave Payroll is available in all 50 states to pay independent contractors and employees and to generate W2 and 1099 forms at the end of the year:
- Payroll fees vary by state and range from $20-$35 monthly base fee + $6 per active employee + $6 per independent contractor.
- Direct deposit payments to employee and contractor bank accounts.
- Employees can log into their Wave Employee Portal to access pay stubs and W2s and manage contact and banking information.
- Generates year-end tax forms for W2s and 1099s.
- Breaks down payroll expenses by type, employee or contractor, and more.
- Payroll journal entries automatically flow into accounting records.
Two other solutions offered by Wave are Wave Money and Wave Advisors:
- Wave Money provides a small business bank account with a linked Visa business debit card and a mobile app. There is no required minimum balance or monthly fees, although currently the service can only be used by a single-owner sole proprietor business.
- Wave Advisors is a personalized bookkeeping, payroll, and tax service staffed by in-house professionals. Fees range from $149 per month and up for bookkeeping and payroll support, to a one-time fee of $299 for accounting coaching and annual fee of $899 or more for tax service.
Can Wave be used for rental property accounting?
Wave comes with a variety of free features and can definitely be used for rental property accounting. However, before setting up a Wave account for real estate, there are a couple of important drawbacks to be aware of.
Each rental property has to be set up as an individual company under the same Wave account, and linked to its own bank and savings account. Each rental property (or company, as Wave calls it) also has its own chart of accounts, tenants/customers, vendor list, and income and expenses.
Granted, this may not be an issue for an investor with one rental property. But it can be difficult to scale up with Wave as a real estate business grows. While financial reports can be generated for each rental property, Wave can not consolidate financial activity on a portfolio level. That means an investor has to jump back and forth between companies to understand how an entire portfolio is performing.
Secondly, while Wave Accounting does provide a balance sheet, property values need to be manually updated, and depreciation needs to be calculated at the end of each year and entered using a journal entry.
As this blog entry from Wave notes, a balance sheet is only as accurate as the bookkeeping is. So, in order to get a clear picture of an owner’s equity, an investor needs to make a few calculations by hand.
Best alternative to Wave for landlords
While there may be plenty to like about Wave Accounting, one of the major drawbacks is that the software isn’t specifically designed for rental property owners. That’s one reason why many landlords set up a free account with Stessa to keep track of rental property financial performance.
Stessa is ranked as the best overall accounting and reporting software option for landlords by Landlord Gurus, a website dedicated to providing expert advice on residential property management. Best of all, Stessa is free.
The company gave Stessa the #1 ranking for landlord software based on key criteria including income and expense tracking, financial reporting, bank integration, and tax preparation.
Real estate investors with single-family rentals, small multifamily buildings, and short-term rentals use Stessa to automatically track income and expenses, generate financial reports on both a property and portfolio level, and maximize profits through smart money management.
- Dashboard to track unlimited properties on the portfolio and property level.
- Automated income and expense tracking.
- Generate numerous monthly financial reports such as income statements and net cash flow.
- Export tax-ready financials and access the Stessa Tax Center for free.
- Organize and store real estate documents online securely.
- Access Stessa 24/7 from anywhere in the world with an internet connection.
- Update accounts on-the-go with iOS and Android smartphone apps.
- Stessa is free with optional premium paid services for tasks such as rent analysis, and market research.