How Successful Landlords Avoid Accounting Errors with Detailed Financial Reporting

April 21, 2023 TCSMgmt

How Successful Landlords Avoid Accounting Errors with Detailed Financial Reporting

Detailed financial reporting is an important part of effectively renting out an investment home. It’s more than tracking income and expenses; it’s using the data you’re collecting on the value of your property and its performance on the rental market to make smart investment decisions. It might be time to upgrade some key appliances, or perhaps you’re not quite at market rents and could be earning more. Possibly, a 1031 exchange is in your best interest to grow your portfolio. 

The most important reason to be detailed and accurate with your financial reporting is that you don’t want to make any expensive mistakes. If you don’t have a plan in place for your accounting and bookkeeping processes, you could find yourself making a lot of accounting errors. 

That’s not good for you, and it’s not good for your property. 

Ideally, you’ll have a CPA, a tax accountant, or a property manager with a sophisticated accounting platform to help you. If not, there are some steps you need to take to ensure your financial reporting is accurate, detailed, transparent, and organized. Otherwise, you could fall behind or worse – make a miscalculation that throws off all your financials. 

Professional property managers have mastered the art and the science of accurate, transparent, and detailed accounting. Here are some of the reporting techniques we use to keep our owners in good financial shape. 

Good Technology Goes a Long Way

Errors are few and far between when most of your financial reporting and accounting is automated. 

There’s so much to choose from, even for an independent landlord who is only managing one or two properties. Modern accounting systems and platforms have made accounting easier to access. 

Look for accounting platforms that are secure, efficient, and user-friendly. You can enjoy:

  • Generating financial statements and accounting reports
  • Tracking income and expenses
  • Balancing your budget and your bank account
  • Processing rental payments
  • Managing security deposits 
  • Accessing your information from anywhere in the world. 

Accounting technology protects you, as well. If you have to evict a tenant or go to court in a security deposit dispute, accessing the electronic records you need and providing a breakdown for the costs you incurred for each tenant will be much easier than making sense of spreadsheets or written ledgers. 

The right technology will allow you to collect rent online, which tenants typically prefer. You’ll know immediately if someone is late, and you can generate a notice to hold your tenants accountable. 

Carefully Track Your Income and Expenses 

If there’s going to be an accounting error, it will likely occur either in your income column or your expenses column. Managing accounts payable and receivable can get chaotic if you don’t have a good system in place and a way to make your financial reports seamless. 

At the simplest possible level, you’ll need to track your income and expenses. When it’s time to file your taxes, you’re going to need to demonstrate how much you earned on your rental property and how much you spent maintaining it. This has to be clear, accurate, and transparent. 

Even if you work with an accountant or a CPA, you’re likely the one who will be collecting the checks and paying for repairs. Make sure you can clearly see what you’re earning and what you’re spending on a monthly, quarterly, and annual basis. 

How to Budget and Forecast without Error

Good financial reporting allows you to see where you stand right now. You’ll know how much rent is coming in and who is behind in payments. You’ll know which maintenance bills have been paid and which are still outstanding. You’ll have an easy way to track recurring expenses such as landscaping, pest control, homeowner’s insurance, and mortgage payments. 

You need to stay focused on the present, but as a rental property owner, you also need to be thinking about the future. 

Budgeting is incredibly important, especially when it comes to things like:

  • Maintenance
  • Vacancy
  • Lease renewals
  • Tenant turnovers. 

Inflation is more of a factor than ever. Are you spending what you expected this year, or are you over budget? You’ll need to evaluate these numbers as you begin to budget and forecast for the next year. 

For example, it’s a good idea to set aside a maintenance reserve, which will help you prepare for large expenses. Save a portion of your monthly rent in case a new water heater is needed or the air conditioning goes out. Do you have a place in your financial reports where you can see what you’ve saved for such expenses? You should know how much you have in your maintenance reserve and what you want to budget for things like vacancy, marketing, and professional services in the coming year.

With the right accounting practices in place, these costs will be easier to estimate. 

Account for Tax Deductions on your Investment Property

accountingIt’s a huge mistake not to take all the tax benefits that are available to you as a rental property owner. 

Your financial reporting program and process will hopefully allow for the timely reporting of taxable income, which should be generated on a 1099. 

Tax time doesn’t have to be stressful. Whether you have a professional CPA or you’re doing your own taxes, you have a series of deductions you can take that will off-set the tax liability that comes with rental income. These available deductions include:

  • Maintenance, repairs, and cleaning
  • Mileage if you need to travel to and from the property
  • Lease cancellation costs
  • Legal, management, and professional fees
  • Mortgage interest
  • Advertising and marketing
  • Insurance

There’s also depreciation to consider, which is generous by IRS standards. 

If you’re looking for a way to better accounting and financial reporting, we can help. Contact our team at TCS Management, where we can take care of all your bookkeeping and financial needs.

TCS Management is a full service property management company headquartered in Philadelphia, Pennsylvania, also serving Harrisburg, PA, Cherry Hill, NJ, Wilmington, Delaware and the surrounding areas. We focus on single-family and multifamily residential property management of homes, condos, townhomes, and apartment buildings.