Property Management Accounting: Accrual Vs Cash-Basis Method
Being a landlord is a business, and whether you’re managing one property or several, you need a method of keeping track of your transactions. It’s not just about collecting rent (if only it were that easy!) but you also need to decide how to track charges for repairs and services. All of this needs to be reported at the end of the year, not to mention it’s always good to know what your profit margin is!
There are two methods for accounting for your transactions: Accrual and Cash-Basis.
Accrual VS Cash Basis
The Accrual Basis
Using the Accrual Method, you would create transactions when money is earned or owed, not when the money is actually exchanged. An invoice, for example, is a notice of money due. You would note the invoice in your books then, and not when you’ve actually paid the invoice later.
The Cash Basis
When using the Cash-Basis Method, your books would reflect the exchanging of funds from your accounts exactly when it occurs, eg, you would note the invoice when it was paid, not when it was received.
Smaller businesses typically use the Cash-Basis Method, as it is simpler and reflects a more immediate status of where your cash flow is at the moment. The Accrual Method, however, can give insight into the long-term health of your business as it takes into account future income such as rent, and expenses and invoices that are due but have not yet been paid out.
Whichever method you decide is best for your business, keep in mind that you must be consistent! After all, these records are not just for you but are the framework for your reporting to the IRS. Also be aware that if you start with one accounting method and would like to change later on, you must seek approval from the IRS.
Reporting your taxes can be daunting – let Frontline Property Management do the heavy lifting! Our accounting department tracks your general ledger, sends you monthly reports and even files the taxes for your properties so that you don’t have to!
Learn more about our services to find out how Frontline takes the hassle out of property management!
Let us know if you need help with your rental!
Property Management Accounting: The Basics
Your rental property is an investment. You will put your time, energy and money into it – so you will want to see a return on that investment. Combined with active and informed property management, accurate accounting gets you what matters most: your bottom line.
Use our Property Management Accounting Tips to track your profits, organize your books and better manage the finances of your rental revenue!
Create Separate Bank Accounts
In a new age of contactless transactions and long-distance bill payments, if you weren’t already using online payments to collect application fees and rent payments – now is the time! A benefit of e-payments has always been that funds get deposited directly into your account. However, in operating a business, you will need to treat it as one. This means opening separate bank accounts. In fact, you should open at least two to begin with: one for the property you’re managing, and one for tenant security deposits (for reasons we’ll discuss later on in this series).
Every financial transaction for the property will need to be made with its associated account. All income (fees, rent) is deposited and expenses (maintenance / repair, make ready, et al) are paid from the same place, making it easier to track – which the IRS requires. You won’t be relying solely on your bank statements to track the debits and credits to this account – this is just the tip of the iceberg! Keeping the funds separate is the first, and simplest, step to taking your bookkeeping to the next level.
Can I Spend the Money in My Business Account?
Yes! Rent is income, after all! You will need to just “pay” yourself by moving funds from your business account to your personal one. Remember, you will be logging these transactions as part of your accounting process and that’s why you should never spend miscellaneously from your business account, but by all means collect your revenue.
Tip: Keep a “reserve” of funds in your business account for each property. This is a set amount of money that you have set aside for emergency use, deposited into the business account. A reserve acts as a buffer to your personal funds in case you have already paid yourself when a sudden repair is needed on your investment property. Most Property Management Companies require this reserve as well – it’s definitely in your best interest to have!
Should I Create a Bank Account for Every Property I Own?
This is up to you. The better your bookkeeping, the less likely it is that creating multiple bank accounts provides more of a benefit than one well-managed bank account. With accurate accounting, built-in redundancy, and thorough record-keeping, you can operate your entire portfolio out of one bank account. (Remembering to keep security deposits in a second, separate, bank account.)
Tip: Property Management Companies like Frontline Property Management have a dedicated Accounting Department that houses years of experience with detailed accounting. If thinking about general ledgers, double-entry bookkeeping and cash vs accrual accounting is already making your head spin – don’t worry! It’s what we’re here to do!
Let us know if you need help with your rental!
5 Steps to Prepare Your Property to Rent
There are a number of ways that you can improve the quality of your rental property. Before moving on to the superficialities of fresh coats of paint and the curb appeal (which is also important, as it may drastically improve the marketability of your property) you will first need to have these very basic needs covered.
These are steps that you need to take to ensure the habitability of your property and is the first line of defense in identifying issues while they are small, before they become more costly down the road. Remember – neglect is paid back with interest!
Take these five steps to best prepare your property:
- Change the Locks
Everything will need to be re-coded and re-keyed. This will include all doors to the property, gates, mailboxes and any facilities that only tenants have the need to access. Electric key pads are convenient in that they will only need to have their codes reprogrammed, but a standard locksmith is an excellent way to make sure that no prior tenants or vendors can gain access to the property.
- Check Your HVAC System
Bring in a technician to do a tune-up of the heating and cooling system and all its elements. The ducts and vests will need to be checked for mold and all air filters will need to be replaced. Reusable air filters may be replaced by disposable ones, as not all tenants will diligently clean the air filters on a monthly basis, but would rather replace the air filters entirely.
Test everything. A vacancy, whether you have never rented before or are between tenants, is the perfect opportunity to identify key issues. As if you were a tenant yourself, check every room for any issues that you would have moving into and living in that space. Look at the property with fresh eyes and not with what you are willing to live with. The major appliances provided in the property must have full functionality, there must be no drips from any faucets, no toilets that run for long periods of time and no dead outlets.
Revolve any issues from the testing phase of your make-ready! With no occupant to work around, there’s no time like the present to fix problems at their source. Replace broken fixtures and appliances, bring in electricians, technicians and repairmen to ensure that the work being done is up to code, and rest easy with the knowledge that everything from the roof to the foundation is in tip-top shape!
- Hire a Professional Cleaner
Plenty of professional cleaning services offer deep-cleans for make-ready quality work – and you should leave it up to the professionals! Not only will they cover the spots you may not think about (like say, the tops of ceiling fan blades) but can also get into hard-to-reach places; beneath, behind and inside appliances; and will thoroughly deodorize the property. Smell is one of the biggest first impressions new tenants make of a home! Cleanliness isn’t (only) about how it looks, but ensures the sanitary conditions that everyone expects when moving into a new space.
6. Bonus: Hire a Property Management Company! (Pro-Tip: Do This First)
Property Management companies like Frontline Property Management, Inc. get all of this and more done on a regular basis! Our experienced property management company has a well-maintained network of vendors along with the experience to determine when a job is well done. Your property’s make-ready is just the first step in acquiring your tenant – and we have you covered every step of the way!
Interested in finding out what it would take for your property to become rental-ready when managed by us?