Accounting and bookkeeping is necessary for real estate investing, but not necessarily a way to impact ROI.
However, with the right accounting tools and software, investors can increase their income while reducing their expenses. A lot of rental property owners can’t say with certainty what their assets are worth and how they plan to maximize their value.
Sound accounting practices can increase ROI and reduce the risk of major losses. Rental property accounting isn’t complicated, but it can be time consuming.
To maximize earnings, an investor needs to understand their ROI, which, at a minimum, includes:
- Rental income
- Maintenance and repair expenses
- CAPEX allocations
- Vacancy Rates
- Taxes and insurance
- And other variable expenses
Tracking these details keeps the focus on maintaining your investments profitable.
Investing in good accounting software is essential. As professional real estate asset managers, we want to share some tips on how to benefit from good rental property accounting.
Establishing Investment Property Banking
Most investors understand the importance of keeping business and personal accounts completely separate. Some investors establish an LLC, and in that case, separate funds are a legal requirement. Even outside of an LLC, it’s just good business to keep personal and real estate income and expenses separate. You can easily make a mistake if they’re co-mingling, and it will cost a lot to untangle those errors.
Some investors set up different accounts for each rental property. This is a good way to stay organized, especially for those owners who are renting out 10 homes. It’s not expensive to open and maintain a bank account, and as long as all of them are linked to the larger accounting software system being used for rental property accounting, it’s a good way to stay organized.
Developing a good relationship with a local banker is a good way to maximize your asset performance as a strong professional network and always yields great results. Brokers can also help; you can connect with professional brokers who have strong connections with banks and lenders. Investors are always looking for funding, refinancing opportunities, and other financial products that can optimize their leverage positions.
Record-Keeping and Documentation
Organization is a big part of maintaining a profitable rental business. Taking advantage of tax deductions and write-offs is one of the major benefits to investing in rental real estate. It’s a massive advantage that directly contributes to the bottom line. However, these benefits cannot be claimed without proper documentation to back up the deductions. Keep good records that are accurate, detailed, and transparent.
Maintain all your receipts in a digital file. When you work with a professional Houston asset management company, you’ll likely have access to their technology, which should include an innovative accounting system. Otherwise, there are apps available and even software platforms designed to support individual, private investors. The important features to look for include the ability to access records when they’re needed.
Document all the rent that’s collected. Tenants prefer online rental payments, and those are also easier to track and sort.
This type of documentation and electronic tracking will assist with performance tracking because it helps investors understand their metrics. A good accounting system will provide benchmarks that demonstrate the strengths and weaknesses in a particular property or the portfolio as a whole.
Supporting documents also provide evidence if there’s an audit or questions about tax returns. The IRS may demand proof that the income and expenses being reported are accurate. With a solid and digital system, these records can be accessed and documentation provided at a moment’s notice.
Profit and Loss, ROI Reports
After accounts are established and a system has been put into place to gather and track all the necessary documentation, generating reports will be a great way to understand where each property stands in terms of profitability.
Accounting reports and statements can serve as an easy guide in understanding how much is being earned and spent. It helps investors identify properties that aren’t performing as well as they should and it also helps to create new benchmarks and goals. Some investors like to run a quarterly report and others are fine with an annual look at where things stand.
Typically, all profit-and-loss reports will provide a snapshot of operating earnings, which is the money that’s earned on an investment before deducting rental income tax. This isn’t net income, which is the sum of what’s earned after taxes. With data that’s gathered from these numbers, investors can get creative and make digital displays and graphs that make it easier to understand where things are going well and where improvements are needed.
Fiscal trends will quickly show up, and it will become easy to see which properties are losing the most on maintenance or turnover. This will help with future budgeting and forecasting. Having such knowledge directly impacts ROI and rental income. It can help investors make smart decisions about which properties to hold, which to sell, through a 1031 exchange if anticipated capital gains are high.
Invest in Rental Property Accounting Technology
Reputable accounting software can help with banking, bookkeeping, documentation, and reporting. There are plenty of software options out there, even for individual investors who may only be renting out one or two properties.
The best programs and platforms are accessible, user-friendly, and transparent. Anytime there’s an audit, a court action, or even a complaint or dispute from an HOA or a resident or a lender, having the documentation easily available will help.
There are so many tools out there that can help you be better at rental property accounting. Some are designed specifically for real estate accounting, some are not. Here’s a quick list of some of the rental property accounting apps that will help you improve your tracking and automation on the financial side of your business.
Some of the most popular platforms in the property management industry can be especially beneficial to investors interested in doing better with financial accounting and reporting. Some of these include:
- Appfolio. This is a comprehensive, full-service property management software that’s used by many larger management companies. It can be a great tool for investors and property managers who need to think beyond basic accounting and track maintenance, tenants, income, and expenses. The most-used accounting features on this particular platform include deposit tracking, accepting online rental payments, and creating automated fees for things like late rent. It can be customized, but typically works better for larger portfolios.
- Buildium. Buildium is another favorite among professional property managers. The functions with this platform are very similar to those found in Appfolio. It’s not specific to accounting, rather it takes on the documentation and management of the whole process, from property showings to tenant screenings and finally rent collection and accounts reporting. It will collect an investor’s financials, track payments, and manage accounts payable and receivable.
- Quickbooks. One of the most popular general accounting platforms on the market, Quickbooks can be valuable for investors with just a handful of properties to track and manage. Unlike Appfolio and Buildium, it’s not specific to property management, so it’s possible investors have used it before for other business ventures. Simplicity is the biggest selling feature for Quickbooks. It tracks and manages income and expenses. Investors can easily manage their rental properties when it comes to collecting rent, paying maintenance invoices, and tracking professional fees for things like property management, insurance, and legal services.
Those are some of the major and most recognizable platforms, but smaller start-ups and apps are showing up all the time. Often, they’re worth exploring especially for investors who don’t have access to a large technology budget or a platform that comes with professional management services.
Houston asset management companies can help with the technology and the accounting. Choosing to work with a boutique firm that meets every need from the beginning to the end of the investment process is especially beneficial to investors and their ROI. At HNB Realty, we have customized plans in place for each investor who chooses to partner with us. The accounting is taken care of, as is the reporting and the documentation. There’s no need for our investors to buy any software or download any new apps. We take care of all that ourselves, providing the required information and reports when necessary.
Even for investors who are not ready to talk about full-service property management, a local professional can provide recommendations and insight about the systems that might work best. A good asset manager will also make some referrals to accounting professionals and CPAs if that will help.
A comprehensive real estate investing partner who has experience with every facet of the process is always the best and safest bet. When you’re choosing a Houston real estate asset management company, work with a team that’s ready to put your best interests first. To hear more about how our work can increase your ROI, contact us at HNB Realty.