Bookkeeping and Accounting Tips for Landlords

For landlords who want to operate a profitable rental property portfolio enabling you to grow and scale your portfolio, accurate bookkeeping is essential.

Just like all businesses, you must maintain good records that will enable you to evaluate and understand your property’s performance and your return on investment or ROI.

Listen, we know this is not a sexy topic.  But managing your records and finances for your rental property properly can lead to significant tax savings, more rental income, lower expenses, and better profitability.

This episode covers why consistent bookkeeping is so important, what metrics to track, creating a budget, and tips on setting up your ledger accounts.

And in true fashion, we had so much to say that next week we will continue this conversation and discuss the accounting software that is available to rental property owners and self-managing landlords.

LINKS

👉 EP51: The Hidden Dangers of Using Cash Apps to Collect Rent

👉 EP28: The Cash Reserves Blueprint: Protecting & Expanding Your Portfolio

👉 Episode 77: Adding Value to Your Rental Property for Appeal and Profitability

👉 Episode 45: Basic Tax Strategies for Real Estate Investors

👉 Episode 46:  Advanced Tax Strategies for Your Real Estate Portfolio

👉 Episode 7: A Guide to Move Out Procedures and Security Deposits

👉 Episode 35: How Small Gestures Make a Big Difference with Tenants

👉WealthFront: Earn 5% on a no strings cash account.

👉 Email us for an additional ½% bonus (3 months).

👉 Course Waitlist: From Marketing to Move In, Place Your Ideal Tenant
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Transcript

Stacie: 0:00

So if you want to operate a profitable rental property portfolio, where you can grow and scale your properties, accurate bookkeeping is essential. It's just like any other business. You must maintain good records that will in turn enable you to evaluate and understand your property's performance and your return on investment or ROI. These records will also help you when tax time rolls around, because when you have accurate numbers to post on your taxes, you are going to reduce the potential for an IRS audit. Bottom line, if you had a water line leaking in your home, you'd fix it, right? So if your rental property is leaking money, would you be able to notice this? And listen, we know this is not a sexy topic, but managing your records and finances for your rental property properly can lead to significant tax savings, more rental income, lower expenses, and thus better profitability.

1:05

Welcome to your Landlord Resource Podcast. Many moons ago, when I started as a landlord, I was as green as it gets. I may have had my real estate license, but I lacked confidence and the hands on experience needed when it came to dealing with tenants, leases, maintenance, and bookkeeping. After many failed attempts, fast forward to today, Kevin and I have doubled our doors and created an organized, professionally operated rental property business. Want to go from overwhelmed to confident? If you're an ambitious landlord or maybe one in the making, join us as we provide strategies and teach actionable steps to help you reach your goals and the lifestyle you desire, all while building a streamlined and profitable rental property business. This is your Landlord Resource Podcast.

Stacie: 1:53

Hey there, landlords. Thank you for listening to the Your Landlord Resource Podcast. My name is Stacie Casella, and I'm here with my co host and better half, Kevin Kilroy.

Kevin: 2:07

Hello there, everyone out there in podcast land. We really do appreciate you taking the time to listen to all we have to say as landlords and as property managers. We do realize that each and every one of us has a different outlook, perspective, or goal, or a way of doing things as self managing landlords. And we are thankful that you listen to our tips and the way we do things over here.

Stacie: 2:30

I second that. Gotta love an attitude of gratitude, right?

Kevin: 2:34

Most definitely.

Stacie: 2:35

Yeah. Yeah. Negative energy is hard to combat on some days, but for the most part, we really try to put it aside or even put our hand up in the face of it when we just can't handle dealing with it. Anyway. All right. Today we wanted to come on here and talk about the very lovely and exciting task of accounting and bookkeeping for your rental property business. We tried to get it in all under one episode, but unfortunately we are going to split it into two and they're kind of completely different subjects, but they do kind of go hand in hand. This first episode today will be more along the lines of, why consistent bookkeeping is so important. What you should be tracking, creating a budget, and a little bit about setting up your books. So, like what accounts are most common and what their purpose is to your overall financial position.

Kevin: 3:28

And, and I swear we're gonna do our best to not make it too boring.

Stacie: 3:33

Boring? Financials aren't boring. We have a lot of good tips on all the ways that we can help you improve your bottom line.

Kevin: 3:41

So as you can see, Stacie is the money person in the relationship. I mean, she gets so excited. I mean, she can talk numbers for hours.

Stacie: 3:50

I can. Personal or business. I do like crunching numbers and seeing what's possible. Maybe that's why the number, uh, kid number three is in analytics.

Kevin: 3:59

Could be.

Stacie: 4:01

I will say that we will do our best to stick to the important points and keep the episode a little shorter. I know sometimes we go off on tangents and eventually we find our way back to the subject at hand, but we're going to work towards shortening the episodes whenever we can. So if you want to operate a profitable rental property portfolio, where you can grow and scale your properties, accurate bookkeeping is essential. It's just like any other business. You must maintain good records that will in turn enable you to evaluate and understand your property's performance and your return on investment or ROI. These records will also help you when tax time rolls around, because when you have accurate numbers to post on your taxes, you are going to reduce the potential for an IRS audit. Bottom line, if you had a water line leaking in your home, you'd fix it, right? So if your rental property is leaking money, would you be able to notice this? And listen, we know this is not a sexy topic, but managing your records and finances for your rental property properly can lead to significant tax savings, more rental income, lower expenses, and thus better profitability.

Kevin: 5:19

Most definitely. All right, before we begin, let me tell you that next week's episode, which is not necessarily part two, but more along the lines of related content, and it'll cover accounting apps or software that are available for real estate investors, what apps can work with some of the leading landlord or property management software, and the pros and cons of using any of those accounting software programs. All right. So let me start with the easy and maybe obvious stuff, but still worth a mention to our newer investors. First, you want to make sure all of your business finances are separated from your personal ones. And again, this might sound obvious, but think about it. It is definitely happened to us when we're out at Home Depot, getting something for our personal home, and we come across something we remembered we needed for one of our rental units. We just grab it and keep shopping. Then we go to the checkout and toss them all on the same transaction and use our personal credit card to pay for it. Okay, once or twice isn't a big deal, but as you grow in scale, it can be. So, you want to have separate bank accounts and separate credit cards for both business and personal use. And the same goes with your files too. Keep your business transaction and notes in a completely different filing cabinet. Now, if you have an LLC, it is usually required to have separate bank accounts as the information used to open an account is different. So with an LLC, you'll need to provide your operating agreement, which states the percentage of ownership between partners. If you have a name for your LLC, you'll need to provide a statement of information, which will be checked when you open an account. The banks have access to it, and if it doesn't match the operating agreement, and the bank application information, you will not be able to open the account. And, usually, all managing partners will have to sign to the account. So you just can't show up and say that Bob will come in later. So make sure you have all your ducks in a row there. Now this bank account should come with a debit card to be used for expenses. If you want to use a credit card to pay for the expenses, you can use a personal one, but it should only be used for business purposes not personal expenses.

Stacie: 7:42

Yeah. So we have several credit cards and we have opted to use our travel points card for business purposes, and an American Express for personal ones. It's not an issue to transfer points from the travel card to your mileage accounts. Plus when we travel to Idaho to check on our properties a couple of times a year, we can use this card without any worries.

Kevin: 8:02

Right. And it's always fun to book a trip using those miles we earned by buying appliances for the apartments, right?

Stacie: 8:09

Yeah, for sure.

Kevin: 8:11

But the primary reason for keeping your business and personal transactions separate from each other is in case you get audited. So if you have your business expenses commingled with your personal ones and you get audited, that means that the auditor is now going to go through all of your personal finance transactions as well. And if they find income that does not match your personal tax returns, you will be audited for that as well. I mean, not to mention all the hassle. This process can take months and months to complete.

Stacie: 8:44

Alright, a quick story about commingling funds. We have a landlord friend of ours. Well, two for that matter. Both were audited and both commingled their personal and business accounts. Now, I will say that both these landlords are big time. They own a lot of units, like 150 doors or more or something like that. But, they self manage them. One is a broker and his real estate company was audited and man, did they go through that place with a fine tooth comb. And they found a few things. They even had to go through his wife's personal expenses as well, even though she wasn't part of the business. The other landlord used freaking cash apps to accept his rent. And you guys all know how we feel about that. And if you don't go back and listen to episode 51, we'll link it in the show notes. But here is where they went wrong. They use the same cash apps to accept rent as they use for their personal transactions. So when the IRS was auditing this person, they went through all the money that people had sent him for repayment for things like meals or splitting expenses for big vacations and wanted to add them as income. So this person had to go back through every single transaction and prove it was not income. This meant getting other people involved as well to help prove by way of using their receipts. And it was a mess and it was a very very stressful time for this landlord. And you know what? They did find quite a large discrepancy, that because their records were not organized, they forgot to include on their original tax returns.

Kevin: 10:26

Which leads me to reason number two for keeping business and personal finances separate from each other. Because at the end of the year, when you're working to gather all of your paperwork to file your tax returns, and you're going through those last minute bank account reconciliations, having those bank accounts separate will save you from having to filter through thousands of irrelevant transactions, and will help prevent you from adding or not adding correct income and expenses. You know, and we get it. We wait until the last minute to make sure everything is set for our CPA too, but we can afford to do that since we have worked hard to make sure we have a pretty organized filing system and banking procedures. And you guys do not beat yourself up if you don't do this. For many, many years, our stuff was tossed into box and dealt with at the 11th hour before our tax extension ran out, but we realized that this stress and panic organizing was causing us to miss out on a lot of deductions that could have made a big difference come tax time. A lot of people do not realize the importance of having organized financial records.

Stacie: 11:34

Yep. And guess what? Sometimes we are still rushing to reconcile the bank accounts and get our numbers to the CPA so he can do our taxes. I mean, it's so much fun. We can't wait to do that again next year.

Kevin: 11:46

I'm really glad this isn't a video right now because between us are boxes of our returns that, well, I think we're through April though, right? So yeah, we're doing good. Only a few more months to go.

Stacie: 11:59

And you guys, the other reason you want to keep all your ducks in a row financially is so you can keep an eye on your expenses. It is much easier to understand what your management fees are and that your rental income has all been received on time when you're looking at one business account and not seeing all your personal transactions for like Target and Costco and gas stations and your food, et cetera, all mixed in with that. Now I want to talk about how many bank accounts you might need. And for us, It's a minimum of three accounts for each rental property. A lot of bank accounts are free. And if not, and you bank at the same banking institution, you can usually bundle all your accounts to have the average daily balance be enough to cover any bank fees that might come up. We have one checking account for our basic income and expenses. We have another that holds our security deposits and that one's mandatory. And it's against the law to co mingle security deposits with any other funds. And they must remain separate. Why?

Kevin: 13:05

Because it's not your money.

Stacie: 13:07

Ding, ding, ding. Security deposits are the tenant's funds that you're holding. So the law says that those funds must remain separate from general expenses so there's no chance of spending it by accident. And the third account is for reserves. And no, this is not mandatory. But it sure does help you track your money being reserved for your large expenses like property taxes and insurance. You should also be putting money away for vacancies as well as maintenance and repairs and capital improvements, like when you need a new roof or when you have to paint your whole rental property. We do this to keep things easy. And yes, it's one more account to manage, but that account should only have a couple of transactions per month. So it's not hard at all.

Kevin: 13:54

Personally, we like to see how much we have held in reserves in the separate account. I mean, it makes it really easy to know if we can afford an improvement or we have to wait a little bit longer. And the really nice part is when we reach a place where we no longer need to continue to reserve money. That's more income we can take out for ourselves. So let me clarify. We always have to set aside reserves for property taxes and insurance, but once we reach our goal amount for the other reserves, you know, vacancy, capex, and maintenance, we can add that amount to our income draw until we need to build it back up again. If that money is all mixed up with our income and expenses, It makes it really hard to know how much we really have and thus how much we can draw out as income. And if you want to know more about cash reserves check out episode 28 where we laid it all out for you. And of course, we will link it in the show notes, Stace why don't you take budget since that's something near and dear to your heart?

Stacie: 14:58

I love a good budget, especially when it's someone else's money. And honestly I'm not always the best at following our own personal one, but here goes. So good bookkeeping is more than just tracking your income and expenses. Of course, one item you need to account for is CapEx or reserves, which Kevin just spoke about and those covered vacancy, capital improvements or large expenses. You know, like we talked about roofs and fences or full building paint jobs. Also general maintenance, insurance premium, and property taxes. You should have a set amount for all of those being set aside every month. For the variable items like maintenance and vacancies, you can set between one and five percent aside of your gross rents. That number depends on how old your rental is and how large it is. Some use those same percentages between one and 5 percent of the value of the property as a total amount needed to be reserved. So if you have a rental property worth$500,000 and you want to use 1%, you'd be reserving$5000 each for vacancies and maintenance. But you do need to have an idea of how much you plan to, or hope to be able to spend on maintenance to determine if what you plan to reserve is enough. Things like servicing your HVAC every year, changing out old water supply lines, paying for a landscaper or pest control service every month. Also fees that you might have, like for a property manager or even bank fees. Think what else? Utilities that the tenant doesn't pay for can add up quickly. So like water and sewer and trash, which commonly a landlord for multifamily properties are responsible for. You know, you should know all your fixed expenses, things that should cost around the same thing every month. Some variable expenses that business owners forget to consider are accountant and, or CPA and legal fees. Those can add up fast, man. So make sure you budget for those. I think last year our CPA invoice for processing our taxes and four quarterly meetings came to around five grand. And the legal fees we paid for our real estate attorney to assist us with the purchase of the property a few years ago were a few grand too. Now, that was when we have an LLC and the LLC was transferred out of the family name into my personal name. So we had to use an attorney to do that. And again, if we didn't budget for those two expenses, the money to pay them would have to come from somewhere, right? If we had not reserved funds, we likely would have to pull that from our personal funds to pay those bills. Education is another one. Some people will buy a book here and there. Some people like to attend big expensive conferences. We hope that some like to buy online courses and might even buy ours. But education, travel, if you, if your property is not nearby you, which then you have to account for gas or air travel and potentially hotels and meals. And of course, you're not doing this often, but maybe once or twice a year, depending on the condition and how well your property manager is handling things for you. And lastly, improvements are something to think about budgeting for. If you haven't yet, go back and listen to our last episode, number 77, where we talk about all the different improvements landlords can make to their rental properties that are going to add value. Not only did the bottom line, but to the tenant experience and even if you consider selling your rental property at some point. And we'll link that in the show notes. All right, so budget. Basically you can do it on a sheet of paper or you can get fancy and use a spreadsheet app like Excel or Google sheets, but just list down every single thing that you know, or think you might have to pay for over the next 12 months. Do some research for the unknown items, and then figure out what amount you need to have each month to save or pay for all those items from the rental income that you're earning. And it can be freaking scary as hell to do this, you guys, but it's super important.

Kevin: 19:11

Stacie does it and it's a bit nerve wracking when she presents it to me each month. I mean we track the expenses and we see where we are, where we're going, and where we went wrong so we can plan better. One more thing to add and that is you want to keep all of your files, receipts, spreadsheets, bank statements, basically anything you use to process your taxes, you want to keep them for six years. If you get audited and cannot prove what an expense was or was for, then the IRS will make you remove it. And like we discussed earlier, they will be looking at your cash apps like Zelle, Venmo, and PayPal. So make sure those are clean and easy to decipher what is what on. The landlord we mentioned earlier had to add$80,000 to his income level because he couldn't prove that some deposits to his cash apps were not payments for work completed. I mean, we love those apps for personal stuff do your best to leave the business stuff out unless you have one just for business use.

Stacie: 20:17

Yeah, we use PayPal for our business and it works great. And sometimes we use Zelle to pay for services, but everything comes from the work bank accounts not any personal ones.

Kevin: 20:27

Exactly. Okay, the next thing I want to discuss is hiring an accountant and or CPA. Please do yourself a favor and hire one who is established in the real estate investing field. So an accountant will be someone who is checking your books and helping you to do journal entries and discussing if you are truly on budget or not. Our CPA does this for us or has an employee do it. Our CPA's primary responsibility is to process our taxes each year, and then advise us on how to make adjustments in the future so we can get the biggest benefit or refund possible. With that said, it is nice to have our accounting team all under one roof. Having an accountant in one place and your CPA in another when they are not associated with each other will end up costing you more because you have to pay for them to have conversations or be part of your meetings. And you may not need this now, but you will someday. So set it all up now so they can guide and assist you as your rental property investments grow. The bottom line of organizing your finances and hiring an accounting team is for two things. To make sure you can cover your expenses, and hopefully, be able to draw a decent amount of income from all of your properties. They are able to really tell you how your property is doing financially. If they truly understand the key real estate investing metrics, they can advise you and properly audit each property to understand where you can save money and improve your revenue. It is also so you can make the most of the generous tax deductions that are available to landlords. Now we did do two episodes on taxes. Episode 45 was on basic tax strategies, and episode 46 was on advanced tax strategies. We highly recommend you give those a listen, and as always, they will be linked in the show notes for you. Now, can you do everything yourself? You know, of course you can, but I will tell you that Stacie has a degree in accounting and finance and she still leans on our accounting team quite a bit.

Stacie: 22:35

Yeah, I can handle a lot, like all the basic bookkeeping stuff, setting up accounts, journal entries, all that. But there's also a lot that I have no clue about and need those guys to pick up the slack for me. One thing being creating and sending out 1099s to all of our contractors and service companies. If you pay someone more than$600 for a service and they're not on your payroll, then you must send them a 1099 with the total amount that you've paid them. Now, I think this has to be completed by January 31st of the following year and our CPA handles all those for us. If you have a payroll company, they can do them as well. And of course you certainly can do it yourself. If you want to take the time and effort to do it properly I'm, pretty sure you can purchase forms online as a download or at an office supply store. All right, let's switch things up here now and talk about tracking your income and expenses. We did discuss some expenses, but I have some others that you'll need to consider as well. And I'll get to those in a minute. Let me start with tracking your income. Now, I'm not just talking about making sure that all of your rents have been received and received on time, which you absolutely should be doing. I'm talking about tracking your income a couple of other ways. First, take the time to know where your rents stand when it comes to the market you're in. And this is important not only for increasing your rents at renewal and making sure that you can cover your expenses. It can also help in the event that rents have fallen and you might need to plan around how to cover those expenses for your property should you earn less. And look it, reducing rents doesn't happen often, but it absolutely has happened to us and it sucks big time. We have had to deal with over$100 reductions, which in turn costs us$1200 for a one year lease until we can potentially raise rents again. In that particular case, we did not have anywhere that we could really cut, so we had to reduce our income. Now, not a big deal for one unit, but if you're doing this for 10 doors, that's a loss of over$10,000 a year until those rents go back up. Tracking your income also helps you understand your gross rental yield, which is the rental income earned as a percentage of the property value. So let's talk about the different kinds of income you'll see when owning a rental property. You have rental income that is comprised of the actual rents you're receiving and also knowing the potential increases or decreases that you could experience should you have to turn a vacant unit. There is also pet rental income or rents that you're going to charge for the right for people to have their pet occupy the property. Late fees are also income. Although we consider late fees more bonus income because we don't want to be in a position where we start counting on receiving it. Uh, and you have interest income. And many landlords do not consider interest income and it's crazy. Some landlords, a lot of really successful ones actually, have hundreds of thousands of dollars in their reserves. Now for security deposit holds, you need to be careful when it comes to interest. There are some states and local authorities like Los Angeles, California, who require interest earned on security deposits be paid back to your tenant. And we discussed this in episode seven, which is all about the move out procedures and security deposits. And of course we'll link it in the show notes. But the CapEx reserves that you have to hold for long periods of time until you need that roof or even if you have really high property taxes to save for each year. Those should be in interest bearing accounts. So check with your bank to see what products they offer. And we don't prefer CDs because usually you cannot add to them monthly. And should an emergency come up, you can't access those funds without a pretty hefty penalty. And one bank that we have recently been turned on to, and believe it or not, kid number two told us about it. It's an online bank called Wealthfront. And I know there's a couple other banks now that are online that are following up with the same thing. They are legit, FDIC insured, et cetera, but they have an interest bearing account that at the time of this recording is at 5%. And this is a regular old cash account. So you can add money or take money out as needed. And the bonus is that if you use a referral code, which we're happy to send to you, you can add an additional half percent for three months. So, okay, landlords, if you have like$10,000 sitting in a reserve account earning pennies each month, you might want to consider moving it over to an account like this one at Wealthfront, so you can earn$500 annually. The only hitch is that the max you can have per person in your household is$250,000, which is a really nice problem to have.

Kevin: 27:29

Really.

Stacie: 27:31

We'll link our emails in the show notes. Uh, if you'd like a referral code, just email us and we'll send it right over to you. And the last thing I want to address about tracking income is in the traditional sense, like booking it into your financial statements. And this is much easier to do when you're using rental property accounting software, which we're going to talk about that all on the next episode. So Kev, why don't you address tracking expenses?

Kevin: 27:58

Okay, so we kind of touched on this before but just like tracking and knowing your current and potential income you need to do the same with expenses. And it's really not rocket science here you guys. It's important to know what your expenses are by property, not just what it costs to operate your business as a whole. This information allows you to consider what costs are coming. Stuff like the expense of getting your HVAC serviced each spring. It also gives you information to predict what your cash flow will be. And this in turn allows you to optimize your investment and to begin to think about what's next. Expenses, just like income, should be tracked as often as possible. Weekly is best, monthly is fine, and you can even push it out to a quarterly analysis if you don't have a lot of expenses. And when we say tracked, we mean booked, like in bookkeeping. You wanna stay on top of it for analysis purposes as well as not creating a huge burden for yourself come tax time. Being super organized with your bookkeeping will allow you to maximize tax deductions and severely decrease your chance of being audited. The more often you update your accounts, the smaller the task will be and the more likely your accounts are to be accurate. If you take the time to book your expenses and income monthly, you could, and this is more if you choose to use accounting software, be able to create reports that will give you insight into your whole financial picture. This information in turn allows you to make decisions and fine tune your operations and potentially increase your cash flow and profitability. And this is the stuff Stacie gets all hot over. I mean, what's your favorite report again?

Stacie: 29:44

I like the income statement also known as the profit and loss or the PNL,

Kevin: 29:49

you know that even a you even have nicknames for them. Wow. No,

Stacie: 29:53

no, everybody has the same nickname. It includes all the accounts that have had their entries made and it's right there in front of you. So how much was earned and how much was spent. And some programs even offer pro forma income statements where you can take the history of all the entries for whatever time period you want and be able to predict what your income and expenses will be like for like two years out. Conversely, you can actually print an income statement with the current year and then compare it to the last two years so you can see where you've improved or not.

Kevin: 30:26

Wow, Stace, I mean, holy cow, the excitement in your eyes. I haven't seen that in a while.

Stacie: 30:35

I do, I do love money. I'm definitely someone who picked the right degree in college, that's for sure.

Kevin: 30:42

Oh, you're not kidding.

Stacie: 30:44

All right, let me talk quickly about what expenses you need to focus on. Now, if you're a sole owner or have a partnership ownership with your spouse or a single member LLC, the IRS allows you to file your business tax return on your personal tax return under the Form 1040, Schedule E. And here's the expenses that they allow you to deduct from your income. Repairs, maintenance, taxes, insurance, utilities, marketing, management, accounting, legal, office supplies, education, meals, dues and subscriptions, mileage, and goodwill. And goodwill is for such things like gifts for tenants. Just remember that the limit for goodwill or a gift deduction is only 25 per tenant.

Kevin: 31:38

And we did a podcast on that, didn't we?

Stacie: 31:41

Yep. Let me look it up. Hold on. It is episode 35 and it is called how small gestures make a big difference with tenants. And I'll make a note to link it in the show notes.

Kevin: 31:59

That was a good one.

Stacie: 32:01

Yeah, well, they're all good in my opinion, but I'm a bit biased.

Kevin: 32:06

All right, let me jump in here and say, don't sleep on that mileage expense. I mean, it can really add up fast. Especially if you have to travel even 10 miles to and from your properties. I think you get, what is it, 67 cents a mile now?

Stacie: 32:22

Yep. And there's apps that you can put on your phone to track and log it too. So whenever you need a report, you just download a PDF and send it off to your CPA for them to add to your tax return. Kid number one did that when he was commission based and had to drive a lot. I think one year he got like$1500 in mileage or something like that.

Kevin: 32:40

Yeah, well, he was driving like three hours to show properties, which was not common, but we did own a rental property that was 150 miles away. And for just one trip up and back, that was like$200 in mileage deductions. Same goes for when we drive to Idaho to check out our units. That's around 650 miles one way, so that would be$871 in mileage deductions for a round trip, which if you think about it, is a lot more than we pay for flights when we just fly back there.

Stacie: 33:13

Oh, for sure. You see, you guys, all those small things can really add up to a big number, so take time to know what expenses you need to track and do it. Alright, I want to touch base on a couple of accounting basics that you should have an understanding about. And let's start with your chart of accounts. And for those of you who don't know, the chart of accounts is the list of all your ledger account numbers that represent each area of finance that you need to account for. Like accounts payable, accounts receivable, your cash accounts, your assets, your expenses, your income, your accumulated depreciation, all that fun stuff. That's the very first thing that you do. And quite honestly, I would recommend hiring your accountant or pay your CPA to help guide you on setting this all up for your property from the get go. As you book and do journal entries, you're going to add those transactions in a specific accounting period. And it usually is organized by account type like assets, liabilities, revenues and expenses. So, your asset accounts include your properties, accounts receivables that are owed to you, prepaid expenses, cash, like your bank accounts, and fixed assets, like any equipment that you own. Like say, an expensive lawn mower that you use at all your properties for your landscaping. Your liability accounts will be debts that you owe to creditors, like accounts payable to your tradesmen, your landscaper, pest control, all those things, accrued liabilities, and your taxes payable. Equity accounts are what's left of the business after subtracting all liabilities from your assets. And this measures how valuable the company is to its owners or its shareholders. Your revenue or income accounts include money earned from rents or selling products or services and general income, like money earned for such things as management or admin fees that you might charge your tenants. Expense accounts are, well, everything you pay to run your business. Like if you have to pay rent for a space to run your business out of, uh, payroll and all the supplies and services that you use and pay for. As balances in each account accumulate over time, the data can be used to generate financial statements and reports like the balance sheet and the loving income statement. It also helps keep accounting cycles organized. But for setting up these accounts, you need to take time to think about how deeply you want to dive into your financial analysis. So here's what I mean. When you have one LLC that has several properties under that one company, your books will be completed for that LLC, not necessarily for each property, But you can create your chart of accounts to be able to separate out each property if you want to. And this is definitely something that we recommend. This will allow you easy access to know how each property is performing without having to go back through all the accounts and figuring out which appliances were for which property and how much was a landscaping for property one versus property two. You see, if you set up your income as say, account number 700 for rental income, and all your rents go into that one account, how will you easily be able to track if all your tenants have paid or not? One way to combat this is to set up your counts with dots or dashes. So, for our LLC, we have account 700 set up as general income for the LLC as a whole. Then, for each property, we code them as 700. 1 or 2 or 700. 3 and so on. So, let's say for a property located on Main Street, we're going to code all the accounts with a 1. 700. 1 will be rents earned from that property, 825. 1 will be for landscaping for that property. And for property located on Broadway, it's account 700. 2 and 825. 2. For the rental on Capitol Avenue, it's account number 700. 3 and 825. 3. And it doesn't matter if an, if it's an asset or an expense, you code them all the same exact way. But by using dots and dashes, it just simplifies and separates all the income and expenses that you might want to track by property. If you want to dig deeper and go by unit, same thing. Just add another dot or a dash with a unit number. So 700. 2. 1 for unit one, 700. 2. 2 for unit two and so on. And I know that sounds confusing as hell, but I just wanted to give you a gist of what using accounting software can offer. if you just track your income and expenses by an Excel spreadsheet and hand those off to someone else to enter into the software, and you never do anything with those numbers, you're missing out on an opportunity to really understand where your money is coming from and also where it's going out for each property. And even I, with my accounting background, struggled to set it up and made a couple of crucial mistakes that had to be fixed. But I like how detailed you can get when you have one company that owns a couple of properties with multiple units that are booked separately, but give you an overall picture of the business itself. It's like having multiple streams of income, all being accounted for under one umbrella, but allows you to see the overall financial picture or take a deep dive into just one property or unit.

Kevin: 39:00

I tried to tell you guys how much she loves this stuff, But seriously, having all that financial information at our fingertips has really been a game changer for us. We can look at the income statement and know if we're going to hit our projections for income or if we need to work on reducing expenses or even raising rents to hit our goals. I mean, what a difference from a few years ago. All right, let me take a minute to go over the three basic reports that you want to focus on when evaluating financials. An income statement, also known as a profit loss or P& L statement, is a financial report that summarizes a company's revenue, expenses, gains, and losses over a period of time. It shows the resulting net income and whether the company is making a profit or loss. So let's hope you're always in the black and showing some form of profit. Income statements can be used to analyze trends, forecast, and plan for the future. They can also help rental property owners understand their operations, management efficiency, and performance compared to their other rentals. Let's look at the ways an income statement can help you with your business. Analyzing Trends. They can help identify trends in a business, such as whether expenses and prices are too high or too low. Forecasting and planning for the future. So, if you know you spent$2000 on insurance premiums last year, and you know with all the rates going up significantly, like 6 percent is what we saw in 2024, then you know that next year you will likely have to budget for that increase. Income statements can allow you to see where you can cut expenses and where you can increase income to allow for that 6 percent insurance premium increase. Managing cash flow is another one and it's similar to forecasting where income statements can help you understand your cash flow by evaluating your income and expenses and thus help you decide if you can increase revenue, decrease costs, or both to generate profit. And finally, income statements help when making investing decisions. For example, we know that we can afford to initially not make as much on a new investment because the cash flow from our existing properties make enough to cover us until we really can get in there and learn what that new property is capable of. The balance sheet and cash flow statements are also used for financial metrics, but the income statement is used most often by smaller business owners. But real quick, a balance sheet, also known as a statement of net worth, is a financial statement that summarizes a company's financial status at a specific point in time. It lists all of your assets, liabilities, and investments, and shows how much capital a company has from equity and debt. The purpose of a balance sheet is to help people understand a company's financial health, and to help them make decisions and plans. Now, these are usually only updated and evaluated once a quarter, or maybe even annually, depending on your strategy and goals for growth. Lastly, the Statement of Retained Earnings. Very simply put, a company's retained earnings are the profits left over after paying yourself and the employees. If there are retained earnings, owners might use all of this capital to reinvest and grow faster. These three primary financial statements are the ones that most companies are required to have by law. Especially if you're operating as an LLC.

Stacie: 42:41

And especially if you're going to want to apply for a loan because lenders are going to want to see how you manage your current properties and business as a whole. And the income statement balance sheet, and sometimes retained earnings is what they're going to ask to see during their evaluation. And it's not to get on a tangent, but this is the one reason why many landlords don't want to create an LLC. The way you account for it, especially if you have partners, is much more detailed and professional and holds a lot more requirements than if you own one rental property in your own name. All right, you guys, I think this is where we're going to cut it off. Our next episode will cover the different accounting software that landlords can use as well as how they relate to the information you get when you use landlord management software. But thanks for tuning in and listening to us today. We hope we didn't confuse you too much. But, hey, we'd love to stay in touch with you. We have a private Facebook group where we have been seeing a lot of activity lately with member questions. So that's been good. We are also on Instagram and Facebook and YouTube. So give us a follow on those as well. And speaking of following, if you're new here, please follow or subscribe on your favorite podcast platform so you won't miss out on any episodes. When you subscribe or follow our podcast, it really helps our metrics and gets us in front of other landlords so they can experience our podcast as well. And the whole goal for Kevin and I is to guide all of you out in landlord land to be more efficient and professional in your day to day practice of owning and self managing your rental properties. Alright, a few more housekeeping items. We have a free newsletter that we send out each week that includes a deep dive into a landlord tip, our favorite landlord products, and also has several landlord and rental property management specific articles for you to learn more there. We have a bunch of free downloads that we offer like email templates that we use a guide on tenant screening, checklists, et cetera. And we'll link those in our show notes for you to access. And lastly, we will include a link to sign up for the waitlist on our upcoming course From Marketing to Move In, How to Place Your Ideal Tenant Whew. Lots of stuff to know about there. Anyway, thanks for listening and supporting us. You guys, we are very grateful for each and every one of you. And until next time, you've got this landlords.