The question of how to track and allocate rental property expenses that cover more than one property comes up quite often among Stessa users. Common portfolio level expenses include smaller line items like cell phone charges, auto mileage, and basic maintenance tools, as well as bigger ticket expenses like umbrella insurance, portfolio mortgages, snow removal and other maintenance services for which a single contract price covers more than one address.
Rental property owners wonder whether expenses like these should simply be tracked as overhead or whether they should be allocated to the individual properties. The answer is that you can usually do it either way, as long as you’re consistent. Use Stessa’s “Split” feature to easily allocate expenses among various properties or simply associate them at the portfolio level to leave certain items unallocated.
Here’s why you might prefer one method over the other…
Use Portfolio-Level Expenses for Specific Situations
As your portfolio grows, certain expenses become more difficult to accurately allocate among your properties. You’ll probably also encounter other rental property expenses that aren’t good candidates for allocation in the first place. This is why we recently added the ability to easily associate any income or expense item at the portfolio level to the Stessa platform. These line items are then reported separately on your Income Statement and other reports, so that they can be handled however you (and your CPA) prefer at tax time.
For example, let’s say you have seven properties in your growing portfolio and you’re incurring mileage expenses a few times a week. These trips include both check-ins at existing properties and scouting for new rental properties to acquire. It’s probably most efficient to tally up your total mileage once a month (or even annually), apply the IRS reimbursement rate, and then log a single expense transaction. Allocating the cost fairly among the existing properties is problematic because some of the mileage is related to the pursuit of new investments. In this case, it’s probably best to simply call it overhead and associate the expense transaction at the portfolio-level.
In general, pursuit costs like inspections, mileage, etc. for properties you don’t end up acquiring should never be allocated to existing properties. That has the potential to distort your reporting and could lead to hold/sell decisions based on a faulty interpretation of how a particular asset is actually performing.
Another situation in which you may want to use portfolio-level expenses instead of allocating is when you have insurance policies and other major contracts and expenses that are negotiated on a portfolio-wide basis and are not easily adjusted when a property is added or removed. The same can be said for a portfolio mortgage that covers multiple properties. If you approach debt financing and make borrowing decisions based on portfolio objectives that supersede what might be best for any one particular property, then it probably makes sense to report and understand debt financing activities at the portfolio-level instead of allocating interest and principal payments by property.
Allocate for Accurate Reporting & Easy Schedule E Filings
If you’re just getting started and only have one property in your portfolio, you can simply assign most expenses to the single asset. The concepts of overhead and common expenses don’t really come into play until you have multiple properties and begin to pursue bulk discounts with vendors and utilize certain tools, supplies, and even personnel across your portfolio.
Whenever feasible, we generally recommend allocating these expenses to the individual properties on a monthly basis, for the following reasons:
More Accurate Reporting
If your single insurance policy covers seven properties and you choose not to allocate the cost, it’s nearly impossible to run an accurate monthly report for any single property. The same goes for mortgage expenses, auto mileage, and snow removal costs, among others. If you really want to know how each property is performing on a monthly (or annual) basis, it’s imperative that you capture all income and expenses via a fair allocation to each individual property.
Easy Schedule E Filings
If real estate is a passive activity for you, and you typically receive a K-1 or file Schedule E at tax time, then it probably makes the most sense to allocate as many expenses as possible to the individual properties. The IRS expects passive real estate investors to invest in and own property, but generally does not expect you to be running a related business entity (with its own income and expenses) at the same time.
While there are indeed ways to report general business expenses outside of Schedule E, it’s far easier and cleaner to simply allocate these expenses by property and then include everything directly on Schedule E. If you’re fairly allocating these expenses throughout the year, then there’s virtually no additional work to be done at tax time.
Better Insights & Decisions
Portfolio-level expenses can sometimes mask opportunities for cost savings and make it more difficult to see what’s really going on at a property. For illustration purposes, let’s say that you have a single snow removal contract covering seven properties and one of your tenants vacates October 31. If you’re not allocating snow removal costs to the newly vacant property, you might not notice that there’s probably an opportunity to put the contract on hold for this particular address (and reduce costs) until you find a new tenant.
What’s the Best Rental Property Expense Allocation Method?
Deciding how to allocate rental property expenses that cover multiple properties can be tricky. Sometimes the contract will specifically call out costs by address, which makes it easy. More often, you’ll simply need to work out the most appropriate method and then stick to it.
The most common methods to allocate expenses among rental properties are:
Even Splits per Property
This method works best for expenses that are not influenced by property size or value. Some examples might be snow removal if all of your assets are single family homes since the cost to plow a residence is usually not well correlated with the square footage of the home. The smallest home very well might have the longest driveway. Even splits is the default method available to all Stessa users via the “Split” feature on your Transactions page.
Per Contract Price
Whenever possible, it helps to have the vendor or your property manager break down contract prices by property address. This has a number of benefits, not the least of which is simplicity and clarity around how to adjust the contract should you choose to sell an asset. It also makes allocating costs across a portfolio of rental properties as easy as reading the contract and dividing the invoices accordingly.
Rental dwelling insurance, auto mileage, and certain overhead costs like office supplies and property management fees are often best allocated across a portfolio of properties by relative square footage. The key advantages of using square footage are that it (generally) doesn’t change from year to year and it’s often highly correlated with both property values and the actual cost of providing many common property services.
Value or Income
Other less common ways to allocate expenses would be by relative value or by relative net operating income. Relative value might be the best method for allocating an umbrella insurance policy, since the policy cost is generally a function of the value of the assets being protected. That said, if square footage is a close proxy for relative value, then you’ll probably want to use square footage instead since it doesn’t fluctuate from year to year like property values.
Stessa Supports Both Portfolio-Level Expenses and Allocation
Stessa is designed to be flexible and to continue to meet the needs of all rental property investors, whether you’ve just completed your first acquisition or are now syndicating deals and managing investors. You’ll find both the new portfolio-level expenses feature and the “Split” option for allocation on your Transactions page.
To associate any line item (expense or income) at the portfolio level, just use the drop-down selector under the “Property” column and then select the portfolio name instead of a property address. To “Split” a transaction, click the checkbox in the far left column and then click the “Split” button in the upper right corner of the page.
To send us feedback on portfolio-level expenses, correct an error or omission in this article, or to request that we add new real estate income or expense categories, use the blue circle at lower right when you’re logged in to your account.
Finally, please note that there are many considerations when determining how best to allocate expenses for both reporting and tax filing purposes. Stessa does not provide tax advice and we strongly recommend consulting with a CPA that understands rental property investing before making any final decisions.