You've done your Orlando market research and invested in a rental property. Now it's time to sit back and watch the passive rental income stream in.
What could go wrong?
Landlords face many challenges, and managing finances is one of the major ones. Proper rental property accounting is key to owning successful investments in rental real estate. Many DIY and accidental landlords often make critical accounting mistakes that threaten their success and are sometimes the reason some investments fail.
In this article, we're digging into some of the most common accounting pitfalls and telling you how to avoid them.
1. Failing to Track Cash Flows
You might not treat your investment as a business, but it's technically a rental property business with expenses and revenues. Some landlords only focus on the revenue side, where they keep track of all the money coming in, while others don't bother with income and expense tracking at all.
If you don't track the property's cash flow, you won't have a clear picture of not only your earnings but also your spending. Expenses on maintenance, repairs, utilities, tenant screening, and marketing must be tracked.
Keeping a manual record of the cash flow works, but you can make the work easier by using technology. Find landlord accounting software that can automatically track expenses and revenues.
In addition, maintain accurate records of receipts, invoices, and other documents related to the property's finances.
2. Mixing Personal and Business Finances
Landlords who self-manage their properties might not see the need to separate personal and business finances. Admittedly, it's easier to receive rent payments into your personal bank accounts and you can pay for property expenses out-of-pocket without caring where the money is coming from.
Failing to separate these finances is a big mistake. Besides making it difficult for yourself to monitor the financial performance of the property, come tax time you won't be in a position to make the most of landlord deductions. Plus, if you're required to pay tax on rental income, as is the case in Florida, you risk underreporting or overreporting your income.
Your property needs to have a bank account from day one. All rent payments should be made into that account, and all expenses should be drawn from it as well.
3. Not Taking Property Depreciation into Account
Most people invest in rental real estate because homes typically gain value over time, but that's mostly because of the land on which the property sits. Buildings, on the other hand, depreciate gradually. The depreciation is accounted for as an expense during taxation, so it can help reduce your tax liability.
Landlords who don't account for this depreciation don't take advantage of the tax benefit it brings. Because property depreciation calculations can be complex, it's advisable to hire an accountant to help you.
Rental Property Accounting Done Right!
Rental proper accounting helps property owners maximize profits, comply with tax regulations, and maintain clear financial records for effective decision-making and long-term success. Avoid these mistakes and you'll reap the benefits.
If bookkeeping is a complex task for you or you don't have the time for it, take advantage of PMI Main Street MGMT's accounting and reporting service. As a full-service property management company in Orlando, we also offer other services including marketing, tenant screening, rent collection, and property maintenance.
Contact us today for more information about our services.
