Rental property ownership can be a lucrative business venture, but it also comes with a number of responsibilities.
Managing rental properties is a complex business. You need to find and maintain tenants, handle their complaints and concerns, perform maintenance, manage cash flow, and handle day-to-day operations. You also need to stay compliant with changing industry regulations. You may need to hire and manage staff to help maintain your properties. You could also need to evict tenants who don’t pay rent or follow the property rules.
But one of the most critical aspects of rental property management is keeping accurate financial records. Rental property bookkeeping is essential to ensure you're maximizing your profits and minimizing your tax liabilities.
In this guide, we explore the basics of rental property bookkeeping, its benefits, and best practices to help you get started. Whether you are a seasoned landlord or just starting out, this guide will help you keep your rental finances organized and on track.
Understanding the basics of bookkeeping for your rental property
Understanding the basics of rental property bookkeeping is essential for ensuring the financial success of your rental business.
Here’s are the steps we recommend for setting up the books for your rental property business:
Create separate personal and business accounts
Keeping separate personal and business accounts helps to clearly differentiate between personal and business expenses, making it easier to manage your finances and comply with tax laws and regulations.
Set up individual accounts for each property
Setting up individual accounts for each property allows you to track the financial performance of each property separately, making it easier to make informed decisions about each individual property.
Implement a system for tracking income and expenses
Implementing a system for tracking income and expenses for your rental property helps to ensure accurate recordkeeping and makes it easier to manage your finances. Using accounting software like Xero instead of spreadsheets can help automate some of your processes, store historical data in the cloud for simple analysis, and create flexible reports to help save you time.
Choose between cash or accrual accounting methods
The cash and accrual accounting methods both have their pros and cons. It’s important to understand which method is best suited to your rental business. The cash method records transactions when money is received or paid, while the accrual method records transactions when they are incurred, regardless of when payment is received or made. The Canada Revenue Agency (CRA) prefers that businesses use the accrual method.
Decide whether to use paper-based or digital software
You can choose to keep your rental property bookkeeping records either on paper or digitally using accounting software. A growing number of people prefer digital software programs like Xero for the following reasons:
- You can access your information from the cloud, wherever you are
- Once set up, creating reports is automated
- Historic data is stored and always available to you and your accountant
- You can send invoices directly from the software
- Data is backed up automatically
- Multiple users can access the software
Prepare for fluctuating expenses
Rental property ownership often involves fluctuating expenses, such as repairs and maintenance. It is important to plan for these expenses and budget accordingly. One rule of thumb rental property owners use is to put aside 50% of all rental income for expenses.
Learn the tax requirements for your rental property business
Passive income, generally considered to be income earned through renting properties as a corporation, is taxed less favourably than active income. Renters can have their income considered active if they actively take care of the properties on a fairly regular basis. It is important to educate yourself on the tax requirements relating to rental properties, and to seek the advice of a tax professional if needed.
Benefits of consistent bookkeeping for your rental property
Keeping accurate and organized records is essential for any rental property owner. Not only does it help you comply with tax laws and regulations, but it also provides valuable insights into the financial performance of your properties.
Consistent rental property bookkeeping can provide numerous benefits, including improved cash flow management, tax savings, informed decision-making, peace of mind, and time-savings during tax season. So it’s worthwhile to prioritize rental property bookkeeping.
Accurate financial tracking
Rental property bookkeeping helps to accurately track all financial transactions related to your rental properties, including rent received, expenses incurred, and tax obligations.
Better cash flow management
By keeping track of all your rental income and expenses, you can better manage your cash flow and make informed decisions about reinvesting profits back into the property. You can also use this Xero cash flow calculator to forecast the cash flow for your business each month.
Proper bookkeeping can help you stay organized and keep track of all tax-deductible expenses, maximizing your IRS tax savings at the end of the year. Accurate record-keeping of expenses is crucial for compliance with tax laws and regulations.
Keeping accurate records of expenses provides valuable insights into the financial performance of your rental properties. This information can help you make informed decisions about the future, such as whether to sell a property or make improvements to increase rental income.
Peace of mind
Maintaining organized and accurate records can provide peace of mind and help ensure compliance with tax laws and regulations.
Keeping organized records can save time and make tax season less stressful, as you have all the necessary information readily available.
Learn your tax obligations
Learning your tax obligations is an important step in managing your finances and staying compliant with tax laws. Whether you are an individual taxpayer, a small business owner, or a real estate investor, understanding your tax obligations is crucial to avoiding penalties and interest charges, and maximizing your tax savings.
This section provides an overview of the various tax obligations you need to be aware of and offers tips on how to stay on top of your tax obligations throughout the year. By taking the time to learn your tax obligations and staying informed about any changes in tax laws, you can ensure that you are paying the right amount of taxes, and minimize your tax liability:
- To find out when tax returns are due, check the CRA website to see the deadlines for corporations or for individuals. You can also check with an accountant who is familiar with the tax laws and regulations in your jurisdiction. This information is usually available on the tax agency's website for your province, and can be found by searching for "tax due dates" or a similar term.
- Setting calendar reminders is a great way to stay on top of your bookkeeping tasks and avoid missing deadlines. You can set reminders for specific dates and times, and use them to keep track of when you need to update your books, reconcile your accounts and prepare your tax returns. Consider setting up recurring reminders on a weekly or monthly basis to keep your books up to date.
- Finding an accountant or bookkeeper who specializes in real estate can be helpful if you are a real estate investor, developer or property manager. These professionals have a deep understanding of the financial and tax implications of real estate transactions and can help you manage your finances more effectively. You can search for a real estate specialist by checking the Xero advisor directory, asking for recommendations from colleagues in the industry, or contacting professional organizations for referrals.
- You may have tax-deductible expenses related to your rental property. Examples of deductible rental property expenses include advertising for tenants, insurance premiums, legal and professional fees, maintenance and repairs, property management fees, taxes on the property, utilities for common areas, travel expenses related to managing the rental property, depreciation of the rental property, and interest on rental property loans. These deductions are explained on the CRA website.
- It is important to note that not all expenses related to rental properties are deductible. The CRA also has a list of expenses that are ineligible for deductions.
Manage your cash flow
Cash flow is the lifeblood of a business or individual's financial stability. It is the inflow and outflow of money and is an indicator of a company or individual's financial health. Managing cash flow effectively requires considering factors such as income, expenses, assets, liabilities and debt.
To ensure positive cash flow, you need to have a clear understanding of when money is coming in and when it needs to go out. This can involve creating and sticking to a budget, monitoring expenses, collecting payments on time and planning for unexpected expenses.
Additionally, managing cash flow effectively also requires forecasting future cash flow trends and making adjustments to ensure that there’s always enough money on hand to meet your financial obligations and invest in growth opportunities.
By taking the time to understand and manage cash flow, businesses and individuals can maintain financial stability, reduce the risk of financial problems, and support long-term growth and success.
Rental property analysis tool
A rental property analysis spreadsheet is a useful tool to analyze the current and potential performance of a rental property. It helps you evaluate the financial viability of a property, including the expected cash flow, return on investment (ROI) and overall profitability. Creating a rental property analysis spreadsheet involves the following:
Collect information on the property's income, expenses, taxes, insurance, maintenance costs, and any other relevant costs.
Create a spreadsheet and enter the data in a clear and organized manner. You can use columns for different categories of data, such as income, expenses and taxes.
Calculate financial metrics
Use formulas to calculate important financial metrics, such as the net operating income (NOI), the capitalization rate (cap rate), and the cash-on-cash return.
Use the data and financial metrics to analyze the performance of the property, comparing the actual performance to the expected performance and making adjustments as needed.
Regularly update the spreadsheet with the latest data to keep it accurate and current. This can be done monthly, quarterly or annually, depending on your needs.
By creating and regularly updating a rental property analysis spreadsheet, you can gain valuable insights into the performance of your rental property and make informed decisions about managing and improving its financial performance.
Rental property accounting software
Xero is accounting software that can assist in managing rental property finances by providing a range of tools and features designed specifically for the real estate industry. These tools include:
- Rent tracking: Xero allows you to easily track rent payments, generate invoices and send them to tenants and record any late payments or fees
- Expense management: Xero allows you to keep track of all property expenses, including repairs and maintenance, insurance and utility bills
- Financial reporting: Xero provides a range of financial reports that can help you keep an eye on your rental property finances, including profit and loss statements and balance sheets
- Bank reconciliation: Xero helps you keep track of your rental property bank accounts by automatically reconciling transactions and flagging any discrepancies
By using Xero, you can get a real-time view of your rental property finances, streamline your accounting processes, and make informed financial decisions.
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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