Many rental property owners make it sound like owning a rental and collecting rental income is easy. You buy a great property and collect passive income indefinitely.
But there is much more to it than that. You risk making mistakes and losing money without understanding the ins and outs of rental property ownership.
One common area in which people make mistakes is rental property accounting. Here are a few property finances errors to avoid.
Comingling Funds
Many new rental property owners make the mistake of using personal bank accounts and payment methods to handle their real estate dealings. Although it may seem innocent enough, it may lead to serious headaches in the future as you try to separate your personal and business expenses.
Create a business bank account early and handle all your property management transactions there. Doing this will save a lot of time and allow you to easily show which transactions you have are business expenses come tax time.
Not Organizing Documents
Organization is everything when managing property finances. You must keep track of expenses, income, and everything else that goes into landlord bookkeeping.
It's an issue when finding the information you need is hard. Work to create organizational systems to surface receipts, payments, and other information quickly. Doing this will help you manage information and have everything you need for tax purposes.
Doing Things By Hand
Although it's possible to manage rental accounting by hand in spreadsheets, it's something you want to avoid doing. Making simple mistakes that cause significant issues due to accounting errors is easy.
One of the best pieces of landlord advice you can take advantage of is to use software. With accounting, look for software specific to landlord accounting and other property management practices. If you use a property management company, ensure they also use software to manage finances.
Incorrect Write-offs
You want to protect as much of your money as possible when dealing with taxes. One of the ways you do this with rental income and property management is write-offs, where you deduct from your income based on expenses related to property management.
However, some investors try to write off things they aren't supposed to. Doing this may result in fines from the government or other consequences, so ensure all your write-offs are allowed.
Infrequent Reviews
You need to do more than enter the numbers when handling accounting tasks. You never know when a mistake will occur that throws things off. Regular reviews will help you find these issues.
Set a schedule for reviewing your books. Take this time to verify that all the receipts are accurate and that you aren't missing important details. This data will help you make more informed decisions about your investment properties.
Get Rental Property Accounting Right
Rental property accounting will be one of the most important things to get right as a rental property owner. It isn't just the difference between your mortgage and rent collected. You must also account for the added expenses of owning a rental.
If you're struggling with landlord bookkeeping and need help, PMI Michiana offers many services that can help you properly manage your books. We offer accounting and booking help, as well as property maintenance, tenant screening, and other services. Contact our team today to learn more about how we can help.
