Most commercial real estate investors are not accountants and aren’t necessarily interested in rental property accounting. But, knowing how to manage your rental property income is a really important part of commercial real estate investing. Done well, it can lead to increased rental income, tax savings, lower expenses and better Return on Investment (ROI); done poorly it can lead to lost opportunities. Accounting for your rental properties takes some understanding but it doesn’t have to be this stressful. Read on to learn about commercial real estate accounting 101 and how to set up a system for your property management accounting.
Commercial Real Estate Accounting 101: How to Set Up a Property Management Accounting System
Rental property bookkeeping is landlord accounting. A property management accounting system allows landlords to keep accurate records of their properties in order to maximize profits and it all starts with proper record-keeping of revenue and expenses.
Real estate tax-saving strategies
If you plan properly, your commercial real estate business can benefit from several tax advantages. In order to prove that you qualify for commercial property tax benefits, you need to keep clear records.
Owning rental properties can help you with the following savings:
- Deductions for depreciation
- Deductions for repairs, maintenance, upkeep, and other services
- Deductions for real estate taxes
- Exemption from the capital gains tax
How to set up a property management accounting system
- Decide between a financial spreadsheet and accounting software
Regardless of the number of properties you manage, you will need to keep financial records for taxes. If you only have a few transactions per year, a financial spreadsheet showing all income and expenses may be sufficient. If you’re processing multiple invoices each month, you should probably buy accounting software. The data you collect will help create a balance sheet, an income statement, a profit and loss statement, and the cash flow statement.
- Set up each property as its own business
Your accounting software should allow you to create multiple businesses. Each entity should be set up as its own business. Next:
- Open a bank account and credit card for each property so you can easily keep track of the expenses for individual properties.
- Set up a general ledger and chart of accounts for each rental property. At the end of the billing cycle, go through each statement and add each expense into the software.
- Create a spreadsheet with a row for every unit to track rental payments. Each month when rent is paid, add the payment in.
- Handle the monthly accounting cycle
Here are the steps for handling each month’s accounting cycle:
- Collect rent, preferably by ACH so the lease is automatically paid on the due date each month.
- Process invoices for utilities, landscaping, maintenance, and other random expenses.
- Do a bank reconciliation to make sure the balance sheet cash amount matches the bank balance.
- Print financials every month, quarter, or year. The purpose of these reports is to review your cash flow and for filing taxes.
How to make your property management accounting software work for you
Having an effective accounting system in place will help you manage your commercial properties. Here is how to make your property management accounting software work for you:
- Link your bank accounts
Getting through your monthly accounting cycle will be much easier if you can link the bank account for each entity with your accounting software. This way, you won’t need to enter each line of the statement, you will just be double checking that the imported transactions are applied to the right accounts.
- Analyze your financials – at least once a year
You will want to analyze your financials at least once a year to check for capital appreciation and evaluate your rental cash flow. From there, you can prepare your cash flow statement. The cash flow statement and appraisal will let you grade each property on the four key metrics of making money on investment properties (capital appreciation, rental cash flow, tax shelter, and debt paydown.)
- Get an annual appraisal
Holding on to any investment property comes with an opportunity cost so it’s a good idea to get each property appraised annually to decide if it makes sense to hold onto it or put it up for sale.
- Keep an accurate rent roll
One of the most important documents you will create as a commercial property owner is the rent roll. It is the easiest way to identify delinquent tenants and it will be requested if you decide to get a loan on the property or sell it. You will want to make sure that it is up to date and accurate at all times.
Outsourcing your accounting process
Unless you have an accounting background or designation, it may be a good idea to hire a certified CPA or accountant to help with your accounting needs. This is the best way to ensure accurate recording and reporting and to save you the time and stresses around handling this work yourself.
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