Bookkeeping for Landlords: Best Practices for Managing Rental Income

Bookkeeping for landlords is essential to maintaining a healthy rental business. You might be tempted to skip the bookkeeping if you only have a few units or properties. We’re here to warn you that you should never do that. You need clean financial records no matter how small your business is.

Basics of Bookkeeping for Landlords

What is Landlord Bookkeeping?

Bookkeeping for landlords is actually bookkeeping for rental properties. It is the process of systematically recording, classifying, and summarizing all the financial transactions involved. It also entails assessing the overall financial health of the property.

Bookkeeping tasks typically include income and expense tracking, and preparing property taxes and financial statements.

Key Financial Documents to Maintain

Income-Related Documents

• Rental agreements outlining terms of tenancy.
• Rent receipts of payments received.
• Late payment notices and associated fees.
• Receipts for security deposits paid.

Expense-Related Documents

• Utility bills and payment receipts.
• Property tax bills and payment receipts.
• Insurance policies for property insurance, liability insurance, etc.
• Maintenance and repair invoices and payment receipts.
• Invoices and receipts for advertising costs.
• Receipts for payments to property management companies.

Property Ownership Documents

• Title deed of ownership. 
• Property appraisal of value.
• Mortgage statements of the terms of the loan.

Tax-Related Documents

• Depreciation schedule for the rental property.
• Tax returns for federal, state, and local taxes.

Other Documents

• Bank statements.
• Tenant ledgers of rental payments, security deposits, and other charges.
• Vendor contracts with service providers.

Software vs. Manual Bookkeeping

Accounting Software

We find software-based bookkeeping superior for several reasons. Task automation increases efficiency and accuracy and reduces errors significantly. It also gives you real-time financial data.

Software is highly scalable and can easily integrate with other tools like tax preparation software and property management software. Most tools come with advanced budgeting, reporting, and tenant management features.

Even with both upfront and recurring costs, software is worth the investment versus hiring someone to do record-keeping manually. The learning curve for most tools is not too steep, either. Moreover, as long as you back up your data, you don’t need to worry too much about technical problems.

One of the best aspects of software is the robust data security that protects sensitive financial data.

Traditional Bookkeeping

Manual bookkeeping is not all bad, though. If you already pay a bookkeeper vs accountant to do bookkeeping, you have no additional costs. You can also retain complete control over your financial records.

Just remember that it’s time-consuming, labor-intensive, error-prone, and more difficult to manage as the property portfolio grows. Furthermore, it usually doesn’t provide the same level of financial analysis as software can.

Setting Up Your Bookkeeping System

Choosing the Right Bookkeeping Software

Useful software for doing bookkeeping for landlords includes accounting tools, property management tools, and other software for landlords.

Accounting Software

• QuickBooks Online bookkeeping is popular software with income and expense tracking, and tax preparation.
• Xero is a great cloud-based option for bookkeeping for LLC setups and solopreneurs. It offers features like bank reconciliation, invoicing, and reporting.

Property Management Software

• Rent Manager has features like tenant management, rent collection, maintenance tracking, and financial reporting.
• PropertyMe offers cloud-based solutions for property management, accounting, and tenant communication.
• Buildium provides more comprehensive features, including online rent payments, maintenance requests, and financial reporting.

Niche Software

• Landlord Studio is specifically for small landlords who need features like rent collection, maintenance tracking, and tenant communication.
• Apartments.com Rental Manager has a suite of tools including the former Cosy, which focuses on online rent payments and tenant communication. It also features listing help, lease creation, rental maintenance management, and more.

Organizing Financial Records

1. Create a comprehensive chart of accounts with all the categories you need for income and business expenses. 
   • Don’t change the categories unless it makes the system better, to avoid confusion. 
   • Add subcategories for larger sets like maintenance. 
   • Use number coding for easy identification, or color coding to visually distinguish categories.
2. Set up a system for filing your documents. 
   • Use separate, clearly labeled folders for each category. 
   • Keep digital and physical records of all transactions, using the same filing conventions. 
   • Review and reconcile regularly to make sure everything is properly categorized. 
3. Consider hiring an accountant if you’re not sure about categorization or tax implications.

Implementing a Systematic Approach

Bookkeeping for landlords will always involve the same basic tasks:

Daily / Weekly / Monthly

1. Income Recording 
   1. Collect, deposit and record rent payments, late fees, and other income from property services.
   2. File and back up all receipts, invoices, and other documents.
2. Expense Recording 
   1. Pay and record utility bills, maintenance and repair costs, and management fees.
   2. Pay property taxes and insurance premiums.
   3. Record advertising expenses.
   4. File and back up receipts, invoices, and other documents.
3. Financial Statement Review 
   1. Review income and expense statements for accuracy.
   2. Analyze cash flow.
4. Tenant Management
   1. Process and file maintenance requests and tenant complaints.
   2. Collect, deposit and record security deposits.
   3. Update tenant ledgers.
5. Audit to spot errors, prevent fraud, and ensure compliance with tax regulations. 

Auditing 

1. Monthly Reconciliation to verify accurate recording. 
2. Quarterly report analysis to verify accuracy and completeness as well as identify income and expenses trends and areas for improvement.
3. Yearly professional audit with a full charge bookkeeper or certified public accountant.

Essential Bookkeeping Practices for Landlords

Tracking Rental Income

You need to keep a rent roll to track tenants, rent amounts, due dates, and their payment statuses. Keep this updated so you can remind tenants about their rent due dates and address any payment issues promptly.

Make sure your rental contracts include clear terms on late fees and payment due dates. Enforce all policies consistently. Review your bank statements weekly to verify payments received and reconcile with your rent roll for accuracy.

Software that helps with rent collection can automate the process, including sending reminders and accepting online payments. You can track in real time, and integrate it with your accounting software to automate recording of payments. 

Using online portals like PayPal, Venmo, or Zelle makes it easier for tenants to make rent payments. They also offer built-in security to protect financial information. Always issue receipts for each payment you receive and keep all documentation as proof of income.

Managing Expense Records

Record all your operating expenses on a weekly basis. Even if you have only a few tenants, you can easily forget some of the many items, like:

• Local, state, and federal property taxes.
• Property, liability, and rental income loss insurance.
• Electricity, water, and gas payments, 
• Garbage fees.
• Maintenance, repairs, and renovations.
• Lawn care, gardening, and snow removal.
• Advertising and property management fees.

Since they are fewer, you can record capital expenditures monthly, although we still recommend doing all record-keeping weekly. These expenses include:

• Major improvements that increase the property’s value. 
• Depreciation deductions. 

Use accounting software to track expenses. It automates the most tedious tasks and keeps everything organized. Most tools have a built-in chart of accounts that you can customize. 

Make sure you keep all your business finances separate from personal expenses. 

The same as for income, keep records of everything and follow a good system. Regularly review your expenses to identify trends and potential cost-saving measures.

Hire a tax professional if you need help to get the maximum deductions and ensure compliance with tax laws.

Understanding Depreciation

bookkeeping for landlords

Property depreciation is a concept in bookkeeping for landlords that accounts for the reduced value of property assets over time. It allows property owners to gradually reduce these values on paper as a tax deduction. 

Depreciation reflects wear and tear, obsolescence, and other economic factors influencing a decrease in a property’s value. This is a valuable deduction that lowers overall tax liability.

Advanced Bookkeeping Strategies

Cash Flow Analysis

Prepare your cash flow statement and analyze the inflow and outflow of cash from operations, investing activities, and financing activities. Then, calculate the following:

1. Net operating income, and consider additional income sources (e.g. late fees, pet fees, laundry services). Then, calculate your net income (versus net profit).
2. Cash-on-cash return, and assess your profitability.
3. Debt service coverage ratio, and evaluate your financial stability. 
4. Cap rate and compare it to market rates.
5. Break-even point, and analyze your profitability.

Consider different conditions when you analyze your cash flow. Analyze financial ratios to assess the property’s financial health (e.g debt-to-equity, return on investment, profit margin).

Tax Planning and Benefits

Aside from claiming the maximum depreciation deduction allowed, make sure you:

• Note all allowed deductible expenses, including home office space, equipment, and supplies.
• Maintain accurate records.
• Review passive activity rules and material participation to see if you can deduct rental losses against other income.
• Review which properties qualify for lower long-term capital gains tax rates. 
• Consider a Section 1031 exchange to defer capital gains taxes on a rental property sale.
• Consider strategically selling a property where you experienced a loss to offset gains from other investments.

Stay updated on tax law changes and don’t hesitate to get expert tax help to navigate complex tax issues.

Handling Security Deposits

Make sure you clearly outline the terms for the security deposit in your lease agreements. Define the amount, when it’s due, and how it will be held. Make sure it’s not in a personal account. We recommend using an escrow account held by a neutral third party. 

Describe in the lease agreement how any disputes will be handled and resolved. Make sure your policies comply with local landlord-tenant laws. Always issue a written receipt for a security deposit, and consider paying interest on it, if applicable. 

Conduct a detailed inspection of the property with the tenant before they move in. Create an inventory checklist with video or photo documentation of the condition of the property. 

Before you return the security deposit when a tenant moves out, conduct another inspection. Compare this with the move-in inspection to identify any damage or missing items. Give a detailed explanation for any deductions along with supporting documentation. Give yourself ample time so you can meet the agreed timeframe for returning the deposit.

The Benefits of Outsourcing Bookkeeping for Landlords

Why Consider Outsourcing?

We recommend outsourcing bookkeeping for landlords because these hires have specialized knowledge. They are trained to handle financial tasks efficiently and accurately. If you look for one with experience, they will understand the intricacies of rental property bookkeeping.

Bookkeeping outsourcing provides you with expert services so you can save time to do what you do best. Bookkeepers know how to use specialized accounting software and pay close attention to detail. This gives you more accurate records without the hassle. 

We love outsourced bookkeeping because it costs much less than in-house options. But, at the same time, you get someone familiar with tax laws and regulations. They can also spot potential issues before they become serious problems. 

Outsourcing in a nutshell helps you to manage financial complexities without sacrificing quality or breaking the bank.

Selecting a Bookkeeping Service

Look for a service that offers:

• Industry certifications and/or experience with rental properties.
• Cloud-based software that integrates with other tools you use.
• Comprehensive services, including tax preparation and tenant management, if needed.
• Service customization, if you need specialized services.
• Transparent pricing information and no hidden costs.
• Communication accessibility and quick responses to inquiries and requests.
• Data security and privacy protection, including confidentiality agreements.

Common Challenges and Solutions

Late Payments and Bad Debts

Screen potential tenants before drafting lease agreements. Look into local eviction prevention programs that assist tenants in paying rent. Consider getting rental income loss insurance for protection in case of tenant default.

Alongside clear late fee policies, consider including a grace period for unforeseen circumstances. The more convenient online payment solutions you offer, the easier it will be for tenants to pay on time.

Consider eviction only as a last resort, and make sure you understand the local laws and procedures. Offering payment plans and pursuing mediation first is always better.

Consult a landlord-tenant attorney if things start to get out of hand. 

Multi-property Management

Use robust property management software alongside accounting software that can handle multiple properties. Develop a centralized filing system with consistent categorization across all properties.

Review everything at least once a month and keep it all updated. Automate whatever you can and hire a dedicated bookkeeper to review automations and handle the rest. Consult with an accountant as needed.

Frequently Asked Questions

What are the best practices for handling late rental payments in your books?

Follow a system based on your rent roll to track and follow up on payments due. Keep a running calculation of late fees and record dates exactly.

How often should you update your bookkeeping records as a landlord?

Bookkeeping for landlords can be done weekly or monthly, if you don’t have a lot of transactions. If you have complex financial transactions or many rental properties, do more frequent updates.

Are there specific bookkeeping challenges for landlords managing properties in multiple states?

One key challenge for cross-country rentals is different tax laws by state. You need to comply with different property tax rates and deductions, too. 

Some states have rent control laws and landlord-tenant laws can vary significantly between states.

How should a landlord handle bookkeeping for property improvements versus regular maintenance?

Always keep separate accounts for property improvement expenses and regular maintenance expenses. Record everything and keep backups. Make sure you understand the rules for capital expenditures, which increase the value of the property.

Can landlords deduct the cost of bookkeeping software from their taxes?

Any software used specifically for business bookkeeping for landlords is tax deductible. This is true of any ordinary and necessary business expense that is exclusively or primarily for business purposes.

What Is AccountsBalance?

AccountsBalance is a monthly bookkeeping service specialized for agencies & SAAS companies.

We take monthly bookkeeping off your plate and deliver you your financial statements by the 15th or 20th of each month.

You’ll have your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement ready for analysis each month so you and your business partners can make better business decisions.

Interested in learning more? Schedule a call with our CEO, Nathan Hirsch.

And here’s some free resources:

• Entrepreneur Bookkeeping Checklist
• Monthly Finance Meeting Agenda

In Summary

Bookkeeping for landlords can be more complex than you initially thought. But being aware of these intricacies can serve to show you how important it is to keep proper books.