Becoming a landlord is an excellent way to start building passive income that could last a lifetime. But to maximize your profit and minimize stress, there are a few best practices that any new landlord should learn.
Here are 4 important bookkeeping practices to start right from the beginning.
1. Track All Expenses
When you're starting a new business activity, it can be easy to get overwhelmed and let some of the minor things fall by the wayside. But it is vital to start a diligent habit of keeping track of all your expenses and income. That being said, your system of tracking doesn't need to be fancy. When starting out, you can just as easily keep track of your expenses by throwing receipts into a folder as you can by setting up a complicated software program.
What do you need to know about expenses? The most important things are to keep receipts and to identify what each one is for. If you're a pen-and-paper person, you can benefit from logging income and expenses in a book or a spreadsheet for your own purposes. But you'll definitely need to take them with you when you get your taxes done.
Don't forget to track expenses that seem minor or aren't as easy to notice. Mileage, for example, can add up quickly when you're a landlord. At 53.5 cents per mile allowed in 2017, every mile counts toward lowering your income taxes. If you're not sure if an expense is deductible, keep it until you can talk with your accountant.
2. Divide Accounting Between Units
When you only have one rental unit, organization is generally easy. But as your rental business grows into multiple units, it can get complex and easy to lose track of the details. The best way to do accounting for different rentals is to separate the income and expenses and trace them to different units or buildings.
Why is this important? For one thing, your accountant will likely need to do so when filing income tax forms. Having a separate ledger for each unit will save time and money when paying for tax preparation. In addition, you can more easily see how much profit you're making on any given unit and then make decisions about buying and selling assets as well as other strategies.
3. Automate What You Can
Being a landlord can be time-consuming. One of the best ways to reduce stress and alleviate extra work is to automate as much of the administrative and financial legwork as possible. You can offer automatic and electronic rent payment options, rather than collecting checks.
Automating and outsourcing recurring services, such as bookkeeping, landscaping, maintenance, and replacements, can also save time and money. Scan documents and receipts for tax time, and look for an app that logs business mileage automatically.
As your portfolio grows, you may also want to look for accounting software that reduces the amount of paper documents and one-time entries that you're doing.
4. Get Professional Help
Developing a relationship with an accountant and tax preparer is key to ensuring a healthy profit margin and low tax payments. Landlord rules, tax law, and business administration can be complicated and it often changes. But in addition to dealing with the day-to-day recordkeeping, tax and business planning is important.
An accountant can help you determine how to maximize profit on individual units, what are the financial implications of buying and selling assets, and what expenses can help your tax situation.
If you need help putting any of these accounting tips into practice in your own landlord business, the accounting experts at Jendrach Accounting and Professional Services are happy to help.