According to Yahoo! Finance, a financially savvy real estate investor knows the 2% rule. This means that the monthly rent of a rental property should be at least 2% of what you purchased it for to realize a positive cash flow.
Maximizing the ROI on a real estate investment requires intelligent rental property accounting. Many factors can boost your profit or hurt your earning. Many of these nuances are tiny line items you won't catch unless you build the right system for tracking.
Closely monitor your real estate investment dollars and avoid common mistakes. This will ensure significant profits. Here's how.
Using a Personal Bank Account
Owning a rental property means you will be collecting money and paying expenses. These are business transactions, not personal. Best practices for rental property accounting include avoiding the flow of funds through your personal bank account.
That is because you are setting yourself up for an unnecessary challenge. What if the IRS audits you? If your rental property finances are mixed with personal, your personal funds could be frozen.
Tenants will give you a security deposit, too. You want to make sure that you have this separate from your personal finances, especially when the time comes to return it.
Not only that, but it makes managing the accounting for rental properties daily tricky. You want to pull your banking details for the rental property on its own instead of wasting time separating it from other financial aspects of your life.
Not Organizing Documentation
If managing a rental property is not your "day job," it is easy not to take proactive measures to monitor it properly. However, this is a colossal mistake, especially concerning taxes on rental properties. To maximize deductions, you need to track all your expenses.
Plus, during tax season, you want to be able to locate all deductions easily. If finding documents quickly is complex, you are only hurting yourself.
Beyond taxes, what if you need to evict a tenant? You need proper documentation to prove your case and follow the law.
Here are some expert tips when it comes to organization.
- A file to register capital expenses (offsets capital gains taxes)
- A file for managing tax codes
- A file with bank statements
Keep these files specifically on hand.
Not Leveraging Landlord Account Software
Professional property managers will tell you that the best way to avoid rental property accounting mistakes is by letting technology do the hard work. While there are popular applications like QuickBooks, not every software on the market is tailored to managing a rental property.
You need an application that can give you simple ways to see your revenue, business expenses, and profits quickly. Sometimes you will want a more granular glance, like setting the parameters to view a specific property. If you are not a tech or accounting wizard, you should find a niche software, but better yet, hire a property management company to take care of it all.
Experts in Rental Property Accounting
While you want to research best practices, getting a partner with the experience to protect your assets and generate the highest ROI pays. You need a property management company like Terra Residential Services to avoid rental property accounting mistakes.
Founded in 1990, Terra Residential Services pays attention to the details. That is why we are the premier company to work with, specializing in townhome, condo, and single-family home property management in Houston.
Contact Terra Residential Services today to learn more.
