Introduction
It is very hard to manage rental property accounting if you are a busy investor in real estate. And, if you take control of rental property accounting, all the administrative tasks and responsibilities might fall apart.
Accounting can be a back burner for businessmen and entrepreneurs who don't enjoy reconciling expenses. However, having strong strategies for accounting is necessary to master rental property accounting. It also makes sure that you don't make any errors and get the most profit out of your investment.
Moreover, knowing the basics of rental property accounting and setting up practices for efficient bookkeeping is important. It would give you time to manage other important and active areas of business. So here are the best tips for mastering rental accounting, explained briefly by ESPECIA!
Rental Property Accounting
The rental property accounting includes keeping track of every income-related subject and all rental property expenses. These expenses are insurance premiums, real estate maintenance, repairs, taxes, and others. In simple words, every cost related to the management of a rental property comes under rental property accounting.
Other responsibilities under rental property accounting include rent collection and trekking talent payment. But why is rental property accounting necessary? It's important to ensure that a property's expenses and income comply with tax laws. A lot of work is needed to keep rental property accounting books clean and tidy. They should be ready for every audit!
Important Terms For Rental Property Accounting
Whether you are a rental property accountant or real estate investor, it's important to have the knowledge of the following terms:
Depreciation
A term used to describe a decrease in asset value caused by wear and tear over a certain period.
Cost Basis
Before any tax deduction, the original or exact value of a property or item.
Capitalization Rate Or Cap Rate
This term is used to describe the return rate for an investment in real estate.
Asset
A valuable item owned by a person or a business is known as an asset.
Account Receivable
It is the amount of money that is held by tenants which is owed to you.
DTI Or Debt To Income Ratio
It is a financial metric that is used to describe the probability or the ability of a borrower to pay back the mortgage.
Cash Flow
As the terms suggest, the flow of cash at a certain period of time moving out or moving in of a business.
Balance Sheet
It is an accounting document that deals with the net worth, liabilities, and assets of a business or a person.
Appreciation
This term is used in contrast to depreciation. It is used to describe a hike in the value of an asset in a certain period. Appreciation is caused due to various factors, such as increased demand.
NOI Or Net Operating Income
This term describes a measure of profit that generates a real estate asset. This term is used to acknowledge the income potential of rental property. In addition, it is also used in the evaluation of other matrices of real estate during investment decisions.
Income Statement
It is a statement in the form of a document that concludes all the expenses and income of a company over a specific period.
Expenses
Every cost related to rental property, such as utility bills as well as rent, is called an expense.
Rental Property Accounting Practices
There are some specific problems and solutions for rental property accounting. However, some common practices can be helpful to any accountant and landlord for rental property. These practices also help to keep accounting books up to date. Here are the best practices that are undoubtedly handy:
Automation of Transaction Tagging
Many rental property expenses, as well as income, are repetitive. You can easily predict these expenses. Therefore there is no need to mutually tag the expenses and the same types of records again and again. You can easily automate the transaction tagging by their category. Assign these tags to their respective properties.
There are many tools available for the automation of transaction tagging. These tools help tag multiple transactions and even a single transaction based on specific expense categories and income. This saves you a lot of time and energy. As a result, you get your books updated with up-to-date rental property accounting with the least effort.
Separate Bank Accounts
Your accounting and bookkeeping can get confused and messy. This is due to using the same bank account for different rental properties. There it's easy to create separate bank accounts for your rental business.
Having separate bank accounts gives us separate transactions for every legal entity and portfolio. This removes all the complications and complexity. It makes reporting and tagging much easier.
Online Accounting Records Management
What makes tax filing easier is online accounting and managing records. Maintaining all the records of credit card statements, bank statements, income expenses, and more online helps with easy tax filing.
There are many platforms and tools available for these solutions. ESPECIA offers all the solutions for loan insurance, rent collection, and banking on a single platform. This means you can easily maintain the records of your rental business on one platform itself.
Categories Transactions
Don't wait till the last minute to prepare your accounting books. Stay on top of your book preparation by dividing your transactions into categories. You can perform this rental property accounting practice at least once a month. This way, you can also have more clarity for your business and performance.
It will also help you to minimize the probability of errors in real-time. Many mistakes are common during return filing, which can all be corrected by categorizing your transactions. You wouldn't have any trouble with any report of income and expenses.
Add Important Notes
Some transactions are more important than others and require a little more attention. But you can easily get this transaction. So to get a reminder of these transactions, you can add essential notes to them.
This helps to categorize them and add them to your reference easily. Now you can easily remember the expenses and what they were for. In addition, you can also keep track of the warranties and source of income for those transactions.
Manage All Receipts
Whether you are a rental property accountant or real estate investor, it's important to be prepared for the worst situations. Don't take for granted the importance of receipts.
Keep all your receipts and manage them properly. You can also digitally scan and photograph your receipts on your mobile for the easiest access.
Credit Card Or Bank Reconciliation
Reconciliations are a necessity in every business and accounting. They help to ensure that the entries of the Bank match the credit card statement. If you do not conduct a reconciliation of credit card and bank statements, it can cause discrepancies.
These scenarios can result in duplicate transactions, uncashed checks of a deposit, and unclear transactions. You can also automate your transactions which have automatic reconciliation records. It also prevents human error and saves a lot of time.
Conclusion
If you conduct the rental property accounting correctly, you get the most valuable benefits of your business as a business owner. There can be many advantages of successful accounting in rental property. You can also safeguard your business against possible fraud and debt and forecast future expenses.
It also saves a lot of time, effort, and resources, especially during the tax season. You can turn rental property accounting into your benefit and advantage to make your operations successful and track financial flows. If you want to excel in rental property accounting, you must have enjoyed the tips and practices mentioned above.
However, consulting with a professional accounting consultant to help with financial tracking is always important. Rental accounting is one of the many business and real estate operations that significantly affect you as an owner and a business. When done precisely, it minimizes errors and maximizes efficiency. This also allows you to channel your efforts and energy into activities to boost the business.
FAQs
How do you record rent in accounting?
Rent is recorded and maintained under the accrual basis of accounting. Rent is initially recorded in a prepaid account of expenses as an asset. Then the rent is regarded as an expense.
What type of account is rent expense?
Rent expenses come under the expense account. It represents the cost collected by an organization or an individual as a right to use a property or a specified asset. Many companies consider rent as a significant expense coming under the expense account.
What is rent in accounting?
Rental accounting is an expense paid by a business or an individual. The business is responsible for occupying a property or real estate. They can use this property for various operations such as a factory, storage, retail space, office, etc. In business and accounting, rent expense is important as other expenses such as employee wages or marketing costs.
