Staying on top of income, expenses, and cash flow is a key part of owning and operating a rental property. While some investors are satisfied with using a basic spreadsheet for financial reporting, others opt for a more sophisticated rental property accounting system.

Comprehensive accounting packages like Xero may be an ideal choice for bookkeepers and accountants, but it isn’t necessarily the best option for landlords. That’s because most general purpose, off-the-shelf account programs require a steep learning curve to use.

In this article, we’ll discuss the different choices for accounting software and reporting software, review how Xero for landlords works, and take an in-depth look at the best rental property accounting software for real estate investors.

Rental property accounting choices

There are 3 main choices real estate investors have when setting up a rental property accounting system:

1. Spreadsheets

A spreadsheet program such as Microsoft Excel, Google Sheets, Numbers, and OpenOffice Calc are a default option for many beginning investors. The software is usually already on a device that an investor owns, is free or very low cost, and works on computers, smartphones, and online.

Even though they’re electronic, spreadsheets are similar to the bookkeeping ledgers of a generation ago. Entries need to be made manually, and an investor needs to have some knowledge of how credits and debits work.

To save the time and trouble of setting up a spreadsheet from scratch, an investor can download a ready-made spreadsheet template to track rental income and expenses. 

For example, the Zillow Rental Income and Expense Worksheet is an easy-to-use spreadsheet for rental property accounting that may be a good choice for investors with 1-5 properties. The worksheet can be customized to fit an individual investor’s unique needs, and can also be used with Zillow Rental manager for online rent collection, although the two programs don’t sync with each other.

While there are some benefits to using a spreadsheet, it can be far too easy to make a data entry mistake or forget to record an expense that could be a valuable deduction at tax time. 

2. Accounting software

Software specifically designed for accounting and bookkeeping is the next level up from a spreadsheet program. 

Some of the best free and paid accounting software systems for landlords include Stessa, QuickBooks, Xero, Freshbooks, and ZipBooks. However, Stessa is the only free accounting software specifically designed for rental property owners.

One of the advantages of using accounting software over a spreadsheet is that accounting software automatically does double-entry bookkeeping. 

For example, when a tenant pays the rent on the 1st of the month, the checking account balance is increased and the tenant’s outstanding rent liability is decreased. Or, when a mortgage payment is made, the outstanding principal balance is reduced on the balance sheet, the interest part of the mortgage payment is recorded as interest expense, and the checking account balance is reduced. 

Using rental accounting software also gives a business a more professional appearance. A lender will often ask for a P&L (profit and loss) statement each year, and providing a professionally formatted and printed report can be much more impressive then a computer printout of a spreadsheet.

3. Property management software

Property management software offers real estate investors the best of both worlds by integrating accounting software with all of the other key features an investor needs to manage rental property.

Some of the best free and low-cost property management software solutions for landlords include Stessa, Rentec Direct, and Landlord Studio. Rental property management software like these help an investor to automatically track income and expenses, balance assets and liabilities, and keep accurate records in case of an audit.

Most property management software systems also have features to market a vacant property, screen prospective tenants, sign a lease online, collect rent process maintenance requests, and store documents entirely online. Landlord-friendly features like these can help to keep cash flow strong by keeping tenants happy and taking better care of a rental property.

How Xero works

There are a lot of things to like about Xero, especially for users who have a solid bookkeeping or accounting background. Key features include:

• Connecting bank accounts
• Sending invoices online
• Accepting payments
• Paying bills
• Generate accounting reports
• Bank reconciliation
• Contact management
• Data capture and storage
• Sales tax calculation
• 1099 reporting 

The Xero App Store is home to applications an investor can integrate with Xero to add more functionality to the software. For example, Stripe and PayPal apps make it easy to accept payments from tenants, while the AutoEntry app automates the data entry of bills, receipts, sales invoices, and bank statements.

Using Xero for rental properties

The process for setting up a rental property in Xero is similar to the way that QuickBooks works. Because the software isn’t specifically designed for rental property owners, Xero uses generic terminology to fit the needs of almost any business.

This thread from the Xero Community contains a Q&A on how to set up Xero for rental properties, while Xero Central offers a variety of support and resource materials to help a landlord use the software.

Here are the main steps to follow to set up Xero to add a property and a tenant, and track income and expenses:

• Select Advanced from the Accounting Menu.
• Select Tracking Categories.
• Add each rental property as a subcategory of the Tracking Category.
• Record rental income received and expenses paid to each property tracking category.
• Run reports from the user dashboard to view the financial performance of each property.

When the property is rented, a tenant is entered as a Customer so that rent invoices can be generated and rent payments received from each Customer/Tenant.

One of the drawbacks to using Xero for rental property accounting is with multifamily properties. Income and expenses can be tracked at the property level, but not at the unit level. 

For example, if an investor has a 3-unit triplex, there isn’t an easy way to keep track of the income or expenses for each individual unit. That’s because Xero lumps the transactions into one amount for the entire property. 

While Xero is an extremely powerful accounting system, the software is primarily designed for a general business owner rather than a landlord. 

Best Xero alternatives for landlords

Landlord Gurus is a website committed to providing expert advice on the complex issues facing landlords and real estate investors. The company recently released its ranking of the best reporting and accounting tools for landlords. 

Criteria used to rank each software provider included:

• Income and expense tracking
• Bank account integration
• Reporting
• Tax preparation

Best overall reporting and accounting software

Stessa is ranked as the best option for landlords looking for an alternative to Xero. In fact, of the 6 rental property accounting software companies reviewed by Landlord Gurus, Stessa received top ratings for income and expense tracking, bank account integration, financial reporting, and tax preparation.

Setting up a property online with Stessa is easy and fast. After entering the rental property address, simply connect the bank and mortgage accounts, and generate numerous financial reports like income statements, net cash flow, and capital expense statements in a single click.

Real estate investors can use Stessa to monitor the financial performance of single-family rental homes, residential multifamily, and short-term rentals. Automated income and expense tracking and smart money management features help investors to maximize profits. 

Features include:

• Track unlimited properties.
• Automate income and expense tracking.
• Run numerous monthly reports.
• Get performance dashboards at the property and portfolio level.
• Organize and store all real estate documents online.
• Securely protect data.
• Track expenses with the iOS and Android apps.
• Export tax-ready financials.

The Stessa Essentials plan lets landlords use its primary features at no cost. Users can create as many properties and bank accounts as needed, generate unlimited financial reports, and export their transaction data to Excel as often as they like.

For access to more sophisticated features, Stessa Pro is available at $16/month billed annually or $20/month when billed monthly. The upgraded plan comes with several additional benefits, including:

• Premium 5.09% APY* on Stessa Cash Management banking balances
• eSigning for up to 5 documents per month with the DocuSign integration
• Accelerated rent payments
• Unlimited receipt scanning 
• Project expense tracking
• In-depth insights and automation on tasks like budgeting and pro forma analysis

As noted above, choosing the Pro subscription package comes with the added perk of an increased APY, courtesy of Stessa Cash Management. These landlord bank accounts offer attractive interest rates without any concealed costs or ongoing service fees. When you do the math at the current 5.09% APY, it shows that keeping an average balance of only $4,000 throughout the year will earn you enough interest to cover the entire cost of a $192 annual Pro subscription.

*Stessa is not a bank. Stessa is a financial technology company. Stessa Essentials is a free service. Stessa Pro is a paid monthly subscription service.  Terms and conditions, features and pricing are subject to change. This article, and the Stessa Blog in general, is intended for informational and educational purposes only, and is not investment, tax, financial planning, financial, legal, or real estate advice.

Best for preparing taxes

Rentec Direct is ranked as the best software for a landlord looking for tax preparation tools. The software streamlines the process of making general ledger entries, and also includes modules for marketing vacant property, tenant screening, tenant online payments, and online file management.

Pricing begins at $35 per month for landlords, after a free trial period.

Best for tracking expenses

Landlord Studio is another full-service property management solution that is ranked as a good option for tracking expenses. The mobile app makes it easy to track, categorize, and store expenses in real time by using Smart Scan technology to digitize receipts. Other features include rental listing syndication, tenant screening, automated online rent collection, and secure document storage. 

After a 14-day free trial, landlords can choose from two Landlord Studio pricing plans with the option of month to month or a discount with annual billing:

• • GO plan: Free for the first 3 units
  • PRO plan: Priced at $15/month (or $12/month when billed annually) for 3 units, with prices increasing by $1/month/unit for each additional unit managed on the platform.