Managing the income and expenses of your investment properties is probably as important as managing your tenants. Sadly, I realized that although I touched on it briefly, I have never really discussed how to set up and do the accounting for your property investment business.
There are many specialized property management software and accounting packages out in the market today. Although I have not tried them all, I understand that most range from expensive to terrible! Trevor over at REIbrain.com has done a good job of review a few of the specialized packages. Click here to see his property management software reviews.
While these specialized software packages may be nice and have all the pre-formatted tenant letters and hold all the tenant information, I prefer to use Quickbooks Pro. This is a standard off the shelf package used by one person companies up to multi-million dollar organizations. You can find answers to questions on the web, they are large enough that they will be around long term, and it is a true accounting package.
One of the most important reasons I use Quickbooks Pro is that my accountant, John Caylor, uses it. When tax time comes, I simply burn a CD with my Quickbooks file and send it to him. He prints the reports he needs and has all my data in case he needs to review an entry. It took me about 2 hours this tax season to compile everything for John (and most of that time was spent simply finding the papers I needed from the mortgage companies).
Quickbooks can have a steep learning curve initially, but once you work through the initial understanding of the software, you will come to love the features. Are you still keeping track of what tenants owe you on an Excel spreadsheet or paper? A true accounting package like Quickbooks will track accounts receivable for you. Every month on the 6th, I simply print an accounts receivable report and statements and call or mail each tenant that still owes money. Try that with Excel!
Streamlining Your Investment Property Accounting Process
- If you haven’t already, set up a new checking account and credit card just for your Property Investment business. It will be much easier to prove to the IRS the trip to Home Depot was for your rental property and not for your personal house.
- Set up a line of credit connected to your checking account to get you over the short falls of when your tenant doesn’t pay on-time (or when you have a vacancy). Make sure it is all automatic and ask for a large credit limit for those unexpected repairs (a new roof, furnace, or other).
- Set up all your bills on auto-pay. In this era, there is no reason to write checks and put them in an envelope to pay for something like your mortgage payment. You are protected by the bank from fraud and missing a mortgage payment or being late can put your investment property empire aspirations on the sidelines for up to a year!
- Sign up for electronic billing and electronic payments on all other bills. This will reduce your paper intake and filing requirements. Despite doing this, I still accumulate about 4″ of paper invoices and statements per month (with 28 rental units)!
- In your accounting software, set up reminders and automatic entries such as automatic entry of: tenant’s rent into accounts receivable at the first of ever month, your mortgage payments, and any other entries that happen when you are on vacation.
Streamlining Your Rent Collection
I have written many times about investment property rent collection. Ultimately, find a process that works for you, but years ago I found I was enabling my tenants bad behavior by agreeing to stop by their house at a time convenient to them to pick up rent. It is not your job to pick up rent, it is their job to pay their rent on time to the location designated on their lease.
If possible, set your tenants up on auto-pay. Have their rent automatically paid from their checking account on the 1st of every month. There are several companies out there that you can sign up with. I even have one tenant that has their work automatically transfer part of the rent directly into my account every pay period!
Watching Your Income and Expense Numbers
Periodically, run a report out of your accounting system to see how you are doing. Very often investors buy a property based on some expense and income assumptions and then never look back to see if their assumptions were correct. They finally wake up one day and realize they are not making any money.
By watching your rents you can also make adjustment to the market that will help offset your rising costs (electricity, taxes, insurance).
Don’t let the office work of owning investment property get you down. Through some simple changes and process engineering, this can easily scale from 1 to 50 properties without too much extra time.