Keeping track of your rental property expenses is essential for maximizing your tax benefits and maintaining consistent cash flow. Staying organized makes it easier to track the value of your investment, do your taxes, and avoid IRS audit nightmares.
Of course, you can’t spend all of your time recording and organizing your expenses. The better you can streamline expense tracking, the more time you’ll have to scout out new properties, network with investors, and grow your rental business. Here are some tips from PMmadeEasy.com to help you track expenses more effectively.
Cash Flow Considerations
Consistent cash flow will ensure you can always pay your bills. Unfortunately, rental property cash flow is rarely guaranteed. Tenants may pay their rent late or not at all, and in either case you might have to pay rental expenses out of pocket. Take steps to encourage accurate and timely rental payments from your tenants. For example, online rental payments are much faster than mailing a check. Tenants who are able to pay rent online are also more likely to pay rent on time, especially when auto-pay is enabled.
Consider creating a custom rental payment app that enables your tenants to pay rent every month. This works great for people managing multiple properties or units. With the help of Plaid’s bank account authentication APIs, you can ensure a streamlined online payment experience for your tenants. This technology instantly verifies bank account and routing numbers when tenants pay via direct bank transfer.
Rental Expenses to Monitor
Your rental property expenses will likely fall into two different categories: Maintenance and general operating expenses. Your maintenance costs will include things like cleaning between tenants, landscaping, pest control, snow removal, and general repairs. Operating expenses include costs like advertising, licenses, mortgage interest, utilities, property insurance, property management fees, and office supplies. You will be able to claim most of these expenses on your taxes, so make sure you keep track of them!
Remember that you can also deduct depreciation to reduce your taxable income. Millionacres.com explains how to track depreciation by separating the value of the land from the home. You can hire a property appraiser, an insurance agent, or a tax assessor to help determine the value of your rental building. Most county assessors send a valuation of your property in the mail notifying you of the value for property tax purposes. The notice usually breaks out the land and the building value.
There are many online tools that can help you track your rental property expenses. This is not a job for pen and paper! Some common online programs include basic Excel spreadsheets, business accounting software, and property management apps. Research different tools and find one that offers the features you need. For example, property management apps often include rent collection, income tracking, lease management reporting, cash flow reports, tenant screening, resident communication, and maintenance tickets in addition to expense tracking.
Follow Bookkeeping Best Practices
Tracking your property expenses is not a set-it-and-forget-it process. You need to dedicate time to update your expenses regularly. Real-time updates will ensure you don’t make any errors, miss important deductions, or lose supporting documentation. When you enter expenses into your tracking tool, digitize your supporting documents immediately so that they can be found alongside each transaction. This will ensure your receipts are easily accessible whenever you need them.
As always, be sure to consult a professional whenever you’re feeling uncertain. A CPA or tax professional will ensure you’re deducting every possible expense to lower your taxes. They can also help you set up your expense tracking software and better understand where your money is going.
Tracking expenses is an important part of any entrepreneurial pursuit. Since rental properties involve some significant ongoing expenses, you cannot afford to neglect your record keeping. Consistent expense tracking will help you keep an eye on your cash flow, reduce your taxes, and evaluate the profitability of your investment over time.
Are you looking for ways to streamline property management? PMmadeEasy.com offers several customizable documents that can help you manage, grow, and profit off your property investment. Explore our website to learn more!