Top Rental Property Accounting Mistakes Landlords Need to Avoid

As a landlord, you have plenty of responsibility on your plate. From screening tenants to managing maintenance requests, it’s all too easy to forget about the less exciting aspect of the job: the accounting.

But if you want your rental property business to turn a profit, both in the short and long term, nothing is more important than understanding your finances.

The Most Common Rental Property Accounting Mistakes

To help you maximize your bottom line, we’re reviewing Home River Group’s most common rental property accounting mistakes landlords make (and explaining how to avoid them).

Let’s get started!

1. Using Your Personal Bank Account

For the uninitiated, using your personal bank account for rental accounting may not seem like a terrible idea – but trust us, it is.

If you use one account to manage your personal and rental property finances, you are setting yourself up for a world of hurt. If something were to happen within your rental business, like an audit from the IRS, and your accounts are mixed, your personal finances could be frozen.

And when it comes to the day-to-day work of managing your business, you’re only making things harder for yourself if you don’t have separate accounts. Home River Group notes that “separating business and personal expenses from a single bank account is immensely time-consuming,” and there are better ways to spend your time (like comparing yourself to the best worst landlords in pop culture, for example).

How to Avoid This Mistake

As REI Hub points out, “separating your personal and business finances is the foundation of easier, stress-free real estate accounting and bookkeeping.”

Their article explains that separating your bank accounts:

• Helps you save money by making it easier to claim all your relevant expenses and reduce your tax burden
• Decreases the amount of time spent working on accounting since you can identify at a glance if a charge is deductible as a business expense
• Protects your personal finances and keeps you compliant, especially since it’s against the law in many states to mix security deposits with other funds
• Allows you to scale your business by simplifying your accounting process as you increase the number of transactions

While this task may seem daunting, particularly if you’ve been mixing your accounts for a while, we highly recommend taking the leap and splitting your accounts ASAP. It’s better to bite the bullet and fix your accounts sooner rather than later since it may take a bit of time – so don’t wait for your next payment to the IRS before getting started.

2. Checking Your Books Infrequently

Procrastinating on accounting doesn’t make the process easier. In fact, waiting until the last minute to balance your books could cost you in the form of missing deductions or lacking adequate documentation. According to Nolo, “every $100 in unclaimed deductions costs the average midlevel landlord (in a 25% tax bracket) $25 in additional federal income taxes.”

$25 may not seem like that much, but let’s put that in perspective. According to our latest State of the Rental Industry report, 43% of our landlords have over 10 years of experience in the industry. If one of those veteran landlords missed out on $100 in unclaimed deductions every year for 10 years, they would have lost $2,500.

Additionally, if you expect to owe at least $1,000 in income tax on your rental profit, you should prepay your taxes to the IRS during the year, Nolo says. Doing so can help you avoid getting slammed with taxes unexpectedly come April. Typically, prepayments are due four times per year on April 15, June 15, September 15, and January 15. If you check your books infrequently, these quarterly dates are sure to inspire panic. Frantic accounting leads to more mistakes being made (and a less-than-fun audit from the IRS).

How to Avoid This Mistake

Keep more money in your pocket by staying up to date with your financial health, and check in often. Home River Group suggests handling your rental property accounting monthly, though we recommend you check on your accounts weekly if possible.

3. Not Organizing Your Documents

A 2018 study of small businesses conducted by Staples revealed that 75% of business owners who are struggling or failing said a lack of organization negatively impacted their productivity, and it’s easy to understand why. As Small Biz Trends notes in the link above, disorganization “means spending more time and money to remedy problems which start out small but soon grow out of control.”

Your challenges as a rental property manager only increase when documentation is hard to find quickly. If you have to evict a tenant, for example, the process is going to be so much more difficult if you can’t find records of their nonpayment.

How to Avoid This Mistake

Home River Group recommends keeping a minimum of three files to stay organized:

1. A file to manage tax codes and filing proof
2. A file to register your capital expenses to offset capital gains taxes
3. A file containing your complete set of business bank statements

Pro Tip:

Digitizing your record-keeping with rental property accounting software will help you stay organized and makes finding specific information way easier.

4. Not Using Accounting Software Made for Landlords and Property Managers

Sure, you might have your own tried-and-true spreadsheet or a subscription to QuickBooks – but have you stopped to wonder if there’s something better tailored to the property management industry? Rental property accounting is nuanced, and neither your beloved spreadsheet nor QuickBooks offers all the features you need to understand your rental business’ expenses, revenue, and profits at a glance.

And if you want to pull a report for a specific property with set parameters, you’ll need to either be a tech wizard who can breeze through formulas without breaking a sweat or understand QuickBooks like the back of your hand.

How to Avoid Making This Mistake

Invest in your success by using accounting software designed for landlords, like REI Hub. TurboTenant is proud to announce our partnership with the best in the rental accounting business to help you stay organized, understand your business’ financial health, and scale your portfolio.

This exciting integration allows you to:

• Automate your rental property’s finances by tracking income and expenses
• Generate rent collection spreadsheets in one click
• Reduce the amount of data entry needed to manage your business
• Download a Schedule E report easily

If you’d like to enjoy this comprehensive tool, sign up today!