Bookkeeping for first rental property

11 Replies

Hi All,

I got my first rental property (SFH) under contract and am now working through the process towards closing. I'm excited about the opportunity, but want to make sure I'm prepared for everything that's about to come. I understand that organized/accurate bookkeeping will be a vital part of managing the property effectively, so I'm here seeking some advice.

When exactly in the process do I need to start tracking expenses?  If I haven't closed on the property yet, do I still need to track money spent on things like inspector/contractor costs during the due diligence process?  What about mileage traveling to the property?  Or do these kinds of expenses only become tax deductible and need to be tracked after the official closing?  Are there any other bookkeeping related things I should be keeping in mind at this point in the process not having closed yet?

These are some of my initial questions, guessing I'll probably have many more later, but appreciate any advice you all have.  Thanks!

Eric

Congrats on your first purchase!

For your first rental property, an excel spreadsheet will suffice. As you grow, you will want to use software, such as Quickbooks or Xero. Software becomes even more important when assets are in an entity, as your CPA will need to complete the balance sheet for the corresponding tax return.

Anyways, to answer your question, I do recommend you open a separate bank account. This account will have all activity related to the rental. All deposits will go in, and all expenses will be paid out from this account

You should track all expenses, even the ones during the due diligence process. Most of these expenses will be capitalized (consult with your CPA), but regardless, you want to track them. Also keep track of all mileage. 

The more accurate your records are, the better it will be not only for your CPA, but also for you. You will feel better about your rental when you are organized.

Don't hesitate to reach out with questions.

Hey Eric,

Congrats on your first deal under contract! (I'm an accountant but, I'm not a CPA or a Tax Professional) but..I'd track expenses in the inception of the buy & hold idea up at least until the beginning of the 2017 tax year, pretty sure you can amend for prior years expenses. If you were driving-for-dollars, took a trip out this year to look for properties, inspection for a potential investment, scope of work for a potential investment or if you incurred incorporation costs, I'd include all of that in my record as my write-offs this year. But, obviously there's nothing to write off if your deal goes south and you never again purchase an investment property because no rental income = no rental write-offs from your Schedule E 1040 form. You could always just bring all the detail & support for your tax deductions to your CPA (preferably a Real Estate or REI focused CPA) and they'll advise on what is deductible and what isn't.

Again congrats on your deal and hope it's only the first of many investments!

@Lance Lvovsky   @Lionel Li Thank you both for the feedback, very helpful info

So can I write-off the mileage from the many times I drove around with my agent looking at properties, before finally finding this one?  I didn't keep track of those trips, but sounds like I might want to go back and calculate how much driving I did?

Also, I don't have a CPA yet, but it sounds like I will need one come tax time, even if I only have one rental property?

Hi Eric,

A CPA isn't really necessary right now. Are you having this rental under an LLC?

Throughout my career in real estate accounting, it is crucial that you track the expenses even before you purchase.

How big do you plan to go? 

Excel is ehh, Quickbooks is ehh, but they work. I would use a web based-software that will deal with accounting and Property Mgmt.

@Simon W. I don't currently have an LLC, but that's also something I'm looking into to try and figure out if I need one at this point. My goal is to acquire more properties, but it will probably be a slow process (maybe one per year starting off).

@Simon W.   Do you care to share any recommendations of such web based software that will deal with accounting and property management?  

I'm in the process of acquiring my first property out of state and will have a property manager.  Is the property management software you're recommending still a good idea/value if you have property management in place?

Originally posted by @Lauren Bishop :

@Simon W.  Do you care to share any recommendations of such web based software that will deal with accounting and property management?  

I'm in the process of acquiring my first property out of state and will have a property manager.  Is the property management software you're recommending still a good idea/value if you have property management in place?

I would recommend Yardi Genesis 2 if you plan to go bigger and switch to Voyager. Genesis2 is 3-4 times cheaper than Voyager but it is very similar in functions and features.

@Simon W. Let me make sure I understand.  You're saying to start with Genisis2 because it's cheaper, and when I go bigger I can switch to Voyager?  Or should I start with Voyager from the outset if I plan to go bigger eventually?

I would transition from Genesis to Voyager. It's easy for Yardi to make the transition. Genesis is roughly $3k a year. Yardi is $10k+ a year. 

I wrote on another post of mine. I am currently using Genesis2. 

https://www.biggerpockets.com/forums/52/topics/548224-property-management-software?page=1#p3338386

I'm thinking this software doesn't make sense when you have a small portfolio.  Paying Genesis $3000/year would be a greater expense than paying my actual property manager and would decimate my returns.  I appreciate the insight, though, and I'll keep it in mind in the future... 

Any other bookkeeping tips for investors who are just getting started and have 1 property with plans to acquire more?

@Lauren Bishop for really simple you can use the app Everlance to track mileage, expenses, and revenue. it's free and very basic, but for 1 property its not bad, especially if you use a PM because they should send you a statement every month that covers most of your expenses and you just plug that until the app. then when you need to send a report to your accountant, or just generate one for yourself, you can export to an excel file.

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