Being a landlord is like running a small business (or a large one if you have enough real estate), and so it comes with many of the same realities of small business ownership. One of these is that you may spend between 26 and 50% of your working time just doing administrative tasks like filing and bookkeeping.
There's no reason why rental property accounting should take that much time. Today, there are plenty of techniques that can help streamline the process. However, be sure to learn about these five common accounting mistakes so you don't make them when you speed up.
1. Doing It All By Hand
If you're still manually processing your rental property books (either with paper ledgers or basic electronic spreadsheets), it's already taking you too long. Getting accounting software for landlords could easily cut the time it takes to capture the numbers and collate the paperwork in half.
Don't let technology's uneasiness stop you from saving time. Outsourcing your landlord accounting is also an option! This will save you much more in time (and its associated opportunity cost) than the price of the service, especially around tax season.
2. Using Your Personal Bank Account
Using one bank account for your business and personal banking creates the time-consuming task of separating transactions when doing your books. If you have an LLC, it even puts your limited liability at risk.
You should always have a separate bank account to mitigate these problems. It reduces both administrative and legal issues. With a computerized system or tenant portal, you can set the system to send rent and other payments straight to the business account and email the documents to the business email address.
3. Not Having a Filing System
Filing and accounting are intrinsically connected because your accounting depends on your documents (particularly if you get audited). Lacking a standardized filing system can lead to losing documents and making big mistakes (like billing tenants incorrectly or forgetting to pay property taxes).
4. Bad Write-Offs
You're only allowed to deduct business expenses from your tax bill. Overstepping this line can get you a nasty fine or even jail time if you're not careful. That's why it's important to double-check your tax write-offs and also choose your accountant wisely.
5. Infrequent Accounting
On the other side of the extreme are the landlords, who do far too little administrative work. You could be missing tax returns, running a huge loss, or even missing rent from certain tenants.
If this is you, all you need is a day once or twice a month to do your books. If the accounting is overwhelming, you can also outsource to property management.
Get Expert Rental Property Accounting Advice
Recording the way you manage your property finances is just as important as every other aspect of the rental property business. Today, you can do it much quicker, but you have to watch out for common pitfalls.
Use technology to increase your speed and accuracy, improve your document management, and help combat infrequent rental property accounting. Also, ensure that you use a separate bank account to make things easier and check that everything you expense is legitimate.
If you want more landlord advice in this or any other area, PMI Antelope Valley is here for you. Contact us today to get an unbeatable personalized service.
