Categories: US Real Estate

4 Tips for Tracking Expenses for Your Rental Property

Investing in real estate is a great way to earn passive income, especially if you enjoy the juggle of owning multiple properties.

For those who are actively working with a real estate agent to buy more houses, it can be challenging to keep track of all the money coming in and going out. This is an incredibly important part of being an efficient property manager. The organization will help you safeguard your finances and prepare for tax season. Maintaining detailed accounts for each property will save you time and money, while also reducing frustration down the road. 

Read on for everything you need to know about streamlining your expense tracking, whether you have one property or a dozen.

What qualifies as an expense?

Before diving into a few tips for tracking your rental property expenses, let’s discuss what qualifies as an expense in the first place. This is especially important to have when it comes time to file your taxes because you’ll want to see any expenses that qualify as a deduction. 

If you own a rental property, here are some common expenses you could expect every month:

  • Mortgage Interest – The interest you pay on a mortgage on a home that is used for business or investment purposes
  • Taxes – Property tax, land tax, or even school district taxes you owe for your property
  • Advertising – From website ads to mailers, or even commission owed to a realtor, any money you spend on finding new tenants is an advertising expense 
  • Utilities – Any utility you decide to cover for your tenants, whether it’s the water bill or internet 
  • Repairs – Money spent on issues that may arise, such as a leaking toilet or a broken HVAC system
  • Improvements – Renovation costs for properties that need improvement
  • Office Space – Whether you rent a space or use a room in your house, whatever space is used as your office
  • Software – One-time purchases or recurring fees for software that helps you manage your properties
  • Professional Fees – Money spent on consulting with professionals like accountants
  • Travel – Expenses paid to get yourself to and from your rental properties when conducting routine maintenance and other business

When you see these expenses on paper, it’s easy to understand why staying organized is crucial. Here are some tips for tracking your monthly spending.

Establish separate bank accounts for each property

Keeping your personal and business finances separate is always advised, but real estate investors should take this a step further. 

When you have a designated bank account for each rental, you simplify your financial overview. This will help you see the money coming in and going out. You’ll see exactly what your tenants pay in rent every month, as well as the money you’re paying out of the account for various expenses. 

It’s also helpful to have both a checking and savings account for each of your properties. This can help you set aside funds for various purposes. For example, your tenant’s security deposit or money you’re saving for a future home improvement project.

Lean into technology and automation

Some people prefer old-fashioned pen and paper, but that certainly isn’t the easiest route. Digital bookkeeping will help you maximize your time with minimal effort.

The software can help you quickly and efficiently track expenses. Some apps allow you to digitize and itemize your receipts with scanning applications. Others help you integrate your bookkeeping with other helpful real estate programs. 

One of the huge benefits of leaning into technology is also quick access to financial analysis. When you are using programs to track your expenses, you’ll be able to see at-a-glance information at a moment’s notice. This helps you make informed decisions. Too many investors become overwhelmed and offload properties in a panic, resulting in seller’s remorse. Staying “in the know” will help you see if you’re in financial trouble with a property. 

In addition, automation is a helpful feature that can simplify a lot of your accounting tasks. From paying your mortgages to creating reports, many programs can handle tasks automatically.

Maintain permanent records

The IRS audits thousands of individuals and businesses every year. In many cases, you’ll be audited for a tax season that was many years ago. This underscores the importance of maintaining impeccable permanent records. 

Here are some of the documents you need to hold onto:

In addition, be sure to hold onto records of any noteworthy communication with your tenants. Whether this is dealing with inspections, fines, or other issues, it’s essential to have all of this in the event of a lawsuit.

Hire a professional

Never underestimate the value of having someone with financial expertise in your corner. For some real estate investors, hiring a professional to handle accounting is the most valuable solution.

A certified public accountant (CPA) can help you in many ways. In addition to providing advice on your financial performance and how to track expenses, they can be invaluable during tax season. For example, the IRS allows you to recover some or all of the money you spent on improvements by using Form 4562 to report depreciation. Only a percentage of these expenses are deductible in the year they are incurred, but this is just one example of how an expert can make all the difference. 

This person should be available to consult with you and guide you during tax season and beyond. 

Conclusion

Don’t let a lack of organization keep your real estate business from flourishing. If you follow the tips above, you can ensure your rental properties are profitable.

Take all these numbers you’ve been tracking and plug them into an online calculator to see how you’re doing. This will help you confirm that your return on investment (ROI) is promising. 

Tracking expenses is key to building a real estate portfolio that will keep you earning for years to come. 

Thomas O'Shaughnessy

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