The money matters involved in real estate investing are often complex. Tracking income and expenses seems easy enough, but it can quickly grow complicated, especially if you’re not sure whether that drywall is an improvement or a repair, and you can’t remember whether there’s a warranty on the kitchen appliances that now need to be replaced in a unit.
Organization is critical, and with the technology that’s available today, there’s really no excuse for being at a loss when it comes to tracking rental expenses. If you’re still gathering receipts in a shoebox, it’s time to upgrade your systems. And question why paper receipts are even still a thing for you.
We have been effectively managing rental properties for investors for years, and while accounting and financial reporting is not necessarily the best part of the job, we’ve implemented some systems and strategies that allow us to do it well.
Here are some of the most effective strategies that can help you track your rental expenses.
Remember that it’s important to surround yourself with professionals. If this is in any way taxing for you, or you find you simply don’t have the time to track expenses the way you should, reach out to a local property manager. Why suffer? With the help of a great management team and even a smart CPA or financial adviser, you can make this a lot easier on yourself.
It’s Time to Be Digital and Mobile: Invest in Accounting Technology
Tracking expenses online is much easier than tracking them in an old-school paper ledger, we promise.
If you have not already shifted to a digital-first mindset, now is the time to do it, especially with so many platforms and systems available, even for independent landlords and investors. Record-keeping is far more efficient when it’s automated as much as it can be. Trying to sift through your hard copies of pertinent documents can get chaotic. Instead, invest in an online system that allows you to track the expenses associated with each rental property you own. You can also integrate rent collection digitally, cutting down on late and missing payments. An online portal or platform will also help you streamline communication with tenants. You can collect repair requests online, and then match those up to the maintenance invoices that you must track for reporting purposes.
Not only is it critical to go digital, you also want to go mobile. This is especially beneficial to you as an investor, whether you’re renting out only one or two properties or you have a growing portfolio of rental homes you need to track. There are dozens of smartphone apps that might work for you, and it’s worth exploring the digital tools that will help you track rental property expenses right there on your phone or tablet.
The benefit of a phone app is that it allows you to track rental income and expenses wherever you happen to be. If you’re an out-of-state investor, you can see what’s coming and going from afar. If you’re in the field, supervising turnovers or showing your property, the information you need is with you.
Even if you only have a handful of properties and you’re handling every part of the management and maintenance process yourself, this is exactly the type of financial tool that will make tracking expenses as easy as possible.
Know What to Track
What types of expenses do you need to track? There are a variety of receipts and records to keep when you own a rental property, and this is especially necessary when we’re talking about deductible expenses. You need those maintenance invoices and mortgage documents to serve as backup documentation when you’re doing your taxes.
Here are just some of the financial records you want to make sure you keep accurate and accessible in order to track your rental property expenses:
- Tenant leases agreements. Hold onto leases even for tenants who have left your property. We recommend holding those documents for at least five to seven years.
- Any record of costs or expenses that relate to those lease agreements. Commissions that you paid to an agent, for example, or court fees that resulted from an eviction would need to be identified and filed.
- Proof of all rental payments received, including any late fees or additional fees such as pet rent or valet trash fees.
- Bank statements. You should have an account specifically set up for your rental property so you can easily track the flow of cash and itemize the property-related expenses. You want to clearly see that you aren’t commingling business and personal funds.
- Copies of utility bills, receipts for materials and labor, and invoices for supplies and other services that directly relate to your rental property.
- Professional service invoices from partners such as attorneys, insurance agents, accountants, and property management companies.
- Advertising and marketing costs associated with finding and placing a tenant for your vacant property, including online tenant screening costs, online marketing fees, and lease preparation.
- Mortgage documents and records of loan payments made, particularly the interest paid on your mortgage for applicable rental properties.
- Property tax and rental tax statements if your city assesses a sales or use tax for the monthly rent collected.
- Copies of your federal and state tax returns going back several years.
For tax purposes, don’t forget to track your pass-through expenses and your depreciation, as well.
- Depreciation. The IRS has decided that the value of most rental properties can be quantified over a productive lifespan that stretches for 27.5 years. Each year, the IRS expects your rental property will lose value. Depreciation allows you to deduct a portion of the property over that timeframe. The math is fairly simple: let’s say you have a rental home with an actual property value of $400,000. For tax purposes, you divide that by 27.5, and you have a depreciation expense of $14,545. The records you’ll need here are proof of your property’s value.
- Pass–Through. With the pass-through deduction, you can write off the cost of any personal property that you’re using within your rental property. Maybe this is your personal washer and dryer that’s inside the rental home or the lawn mower that’s used to keep up with landscaping. Talk to your accountant or tax professional so you know what you can deduct, and then make sure you have the records necessary to prove your ownership of that personal property.
It’s unlikely that you have any salaried employees, but if you do have someone working for you or your rental properties, you’ll need to keep track of what you pay them in salaries and benefits. If you hire contractors who work on a 1099 basis, make sure you have their W-9s.
Get Comfortable with the IRS
Taxes, right? They’re not fun to think about and who wants to go looking for ways to interact with the IRS?
The thing is, the IRS.gov website actually has a ton of great information for real estate investors. You’ll find information on what qualifies as rental income and, most importantly, how you should approach the deductions you can take as a rental property owner. The IRS will tell you specifically what records to keep and how to report those expenses (and your income) on your taxes.
Don’t discount the value that the IRS can deliver when it comes to helping you be smart about your tax filings. A lot of the expenses you encounter as a rental property owner can be turned into deductions, and you want to make sure you’re leveraging every benefit that’s available.
Why Expense Tracking Matters to Investors
Is strict financial tracking something that you really need to worry about? What if you’re only renting out one property and you’ve had the same tenant there for five years. Does it really matter?
The answer is yes. No matter what kind of scenario you’re working with, you have to track your rental property expenses accurately and transparently. Even if you only have one property. You’re still required to declare that rental income on your taxes. You’ll still want to deduct whatever expenses you can at tax time.
Tracking rental property income and expenses helps property owners by allowing for expedited and less stressful tax filings, streamlining your process if you find yourself being audited by the IRS, and ensuring that all of the information that you do submit to the IRS is accurate.
Most importantly, tracking the expenses associated with your investment property will help you understand whether you have a profitable rental property. You won’t know you’re bleeding money on maintenance or recurring services if you don’t have a clear snapshot of what you’re actually spending.
Tracking expenses can help you budget. It can help you make smart investment decisions for the future.
As property managers in Florida, we have created a system that works well for our owners and investors. All of our property management technology is integrated, allowing us to be precise, accurate, and thorough. If you’d like to talk about how we can help you with financial management and property management, please don’t hesitate to contact us at Anchor Down Real Estate & Rentals.
