Even though I should know better, I got behind in my record keeping last year and had to struggle through everything during tax time. I just couldn't find the time to keep the property management books up to date. Between starting up our online real estate investing education business, a property renovation, getting married and our extracurricular activities (we love adventure racing), I didn't have much time left for bookkeeping.
I would always put the bookkeeping off until the next day, the next month... and kept pushing the task later and later. At the end of the year I realized that I had not recorded a single receipt or expense for that whole year! Since I always tell other investors NOT to do this, I was shocked at how I had allowed this to happen.
We don't prepare our own taxes (we have an accountant do it). But I hadn't even done the work required to hand everything over to the accountant!
Thankfully my husband Dave and I have a really good system in place - so entering receipts actually went quickly and easily (considering it had been a year since I had done anything).
I still recommend you stay on top of your income and expenses to ensure you are quickly identifying areas where you can reduce costs or increase income. You'll need to do this carefully for a little while until you become familiar with what is a normal cost for something. But, just in case you fall behind like I did, here's an easy way to keep your records clear for rental properties:
1. Open a separate bank account for EVERY property you own. ONLY use this account for income and expenses related to this particular property. To me this is ABSOLUTELY essential when you have partners involved, but it's smart to do even if you only own one rental property. It keeps your records clean and simple, and you always know whether your property is making money or costing you money - because there is either money in the account or there isn't!
2. When you spend money out of your own pocket or on a personal credit card, get a receipt and write the address of the property on that receipt, the specific unit number (if applicable) and the REASON for that expense. Don't expect to remember why you have a Home Depot receipt in your wallet two weeks, let alone a year, later. Even if you end up with 15 receipts in your wallet for different properties, if you write on the property information on them before you put it in your wallet, you will have no problem tracking and recording that expense. This also goes for coffee or dinner with your partners. If you have a meeting about your investments, record on that receipt who was there, the specific address or addresses of the properties you own with the partner(s) and what specifically you talked about. Write all of this on the receipt before you put it in your wallet.
3. Weekly - review your mail and pay the bills. If you only have one rental property you might get away with doing this less often, but with a bunch of properties, you'll need to set aside a bit of time each week to review all of the bills. You could hire a bookkeeper to do this, but then you'll want to have monthly reports sent to you about the bills that are being paid so that you know when expenses are climbing unexpectedly. So, you'll still need a bit of time to review the report.
4. Of course, now is the time you should enter those bills and statements, but you don't have the time to do it now, right? That sounds familiar. So if you're not going to enter them every week, then it's a good idea to get a set of stacking drawers. Each drawer should be reserved for one property and should contain all paperwork regarding that property. This includes all statements, communications, receipts and bills.
5. On a quarterly basis take everything out of the drawer for each property and enter it into the spreadsheet that you use to track income and expenses. The spreadsheet can be simple spreadsheet that you create in Excel, or you can find another type of software online- a few good options are offered by Buildium and Quicken.
If you follow steps 1 through 4 but often skip out on Step 5, you will regret it when you have to sit down and catch up. However, you can rest assured that you aren't missing receipts or losing track of money that you've spent or earned!
I would always put the bookkeeping off until the next day, the next month... and kept pushing the task later and later. At the end of the year I realized that I had not recorded a single receipt or expense for that whole year! Since I always tell other investors NOT to do this, I was shocked at how I had allowed this to happen.
We don't prepare our own taxes (we have an accountant do it). But I hadn't even done the work required to hand everything over to the accountant!
Thankfully my husband Dave and I have a really good system in place - so entering receipts actually went quickly and easily (considering it had been a year since I had done anything).
I still recommend you stay on top of your income and expenses to ensure you are quickly identifying areas where you can reduce costs or increase income. You'll need to do this carefully for a little while until you become familiar with what is a normal cost for something. But, just in case you fall behind like I did, here's an easy way to keep your records clear for rental properties:
1. Open a separate bank account for EVERY property you own. ONLY use this account for income and expenses related to this particular property. To me this is ABSOLUTELY essential when you have partners involved, but it's smart to do even if you only own one rental property. It keeps your records clean and simple, and you always know whether your property is making money or costing you money - because there is either money in the account or there isn't!
2. When you spend money out of your own pocket or on a personal credit card, get a receipt and write the address of the property on that receipt, the specific unit number (if applicable) and the REASON for that expense. Don't expect to remember why you have a Home Depot receipt in your wallet two weeks, let alone a year, later. Even if you end up with 15 receipts in your wallet for different properties, if you write on the property information on them before you put it in your wallet, you will have no problem tracking and recording that expense. This also goes for coffee or dinner with your partners. If you have a meeting about your investments, record on that receipt who was there, the specific address or addresses of the properties you own with the partner(s) and what specifically you talked about. Write all of this on the receipt before you put it in your wallet.
3. Weekly - review your mail and pay the bills. If you only have one rental property you might get away with doing this less often, but with a bunch of properties, you'll need to set aside a bit of time each week to review all of the bills. You could hire a bookkeeper to do this, but then you'll want to have monthly reports sent to you about the bills that are being paid so that you know when expenses are climbing unexpectedly. So, you'll still need a bit of time to review the report.
4. Of course, now is the time you should enter those bills and statements, but you don't have the time to do it now, right? That sounds familiar. So if you're not going to enter them every week, then it's a good idea to get a set of stacking drawers. Each drawer should be reserved for one property and should contain all paperwork regarding that property. This includes all statements, communications, receipts and bills.
5. On a quarterly basis take everything out of the drawer for each property and enter it into the spreadsheet that you use to track income and expenses. The spreadsheet can be simple spreadsheet that you create in Excel, or you can find another type of software online- a few good options are offered by Buildium and Quicken.
If you follow steps 1 through 4 but often skip out on Step 5, you will regret it when you have to sit down and catch up. However, you can rest assured that you aren't missing receipts or losing track of money that you've spent or earned!
About the Author:
Learn How to Retire with Real Estate with Julie's free Real Estate Investing Starter Tips Guide. Learn how to become a millionaire real estate investor with massive wealth with tips like: How to find quality investment properties, finding and keeping great tenants, and easy ways to make investment property accounting simple and more profitable.
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