Do I need accounting software for my rental properties?
Rental and investment property owners -just like every business- need to track their income and expenses so that they can accurately file taxes and maximize their profits. The stakes are real: inaccurate books can lead to overpaying taxes and making decisions based on flawed data.
Most small business owners use some form of accounting software to help them categorize transactions, monitor cash flows, and stay in control of their finances.
Rental property owners and real estate investors nationwide choose different strategies to help them manage their financial records. Those with very small portfolios often do it themselves with spreadsheets. Those with very large portfolios may outsource entirely or employ a bookkeeper on staff. Investment property owners of all sizes also turn to accounting software to help them stay in control and maximize efficiency.
This article is to help you figure out if using accounting software is the right fit for you and your rental property portfolio.
Accounting software has serious benefits
First, let’s take a look at some of the advantages that using generic small business accounting software can bring to your rental investments.
- Time savings
One of the core benefits accounting software of all kinds offers is the ability to link to your rental business bank account and import a transaction feed. It is a safe and secure way to drastically reduce the amount of manual data entry you need to do, saving you lots of time.
- Increased accuracy
Beyond efficiency, working off an imported transaction feed also increases the accuracy of your books because you are much more likely to account for all of your transactions and expenses. If you are not claiming all expenses, you are likely overpaying taxes. It is also much easier to keep accurate books if you have separated your personal and business bank accounts- read more here.
- Organized, cloud-based data and receipt storage
Accounting software provides a framework that helps you keep your data organized, accessible, and easily communicable. In addition, almost all modern accounting software options are cloud based and allow you to link and storage digital copies of receipts. Not having to physically keep your receipts, or use a separate system to manage them, helps keep your financial management simple.
Rental property accounting software provides even more value
As you can see above, general small business accounting software can be a very useful tool. Accounting software that was made specifically for rental property, such as REI Hub, can be even more beneficial.
Most accounting softwares available today are built with a one-size-fits-all philosophy. That makes total sense for traditional small businesses like retail, but can present problems for unique industries like real estate. While most accounting softwares can be tweaked to work with rentals, it is not always seamless. Dedicated rental property accounting software is designed to optimize the experience and provide industry specific value. Benefits include:
- Already set up for rentals
Rental property accounting software is ready to go for rentals and real estate out of the box. You don't need to change the chart of accounts, you don't need to figure out how to track by property, you don't need to navigate endless accounting jargon. Instead, you can simply add your properties (and call them properties!), add your accounts, and get on with keeping your books.
- Easy to use and optimized for your needs
Rental accounting software won't help you track inventory or manage payroll, but it will help you properly categorize your mortgage payment and get ready for tax time. With a property centric interface and rental transaction templates, rental bookkeeping software is easier to use and understand. Especially for real estate investors and rental property owners without much accounting experience.
- Integrated rental organizational tools
In addition to the above, rental specific software is able to include organizational features specifically geared for the industry. Keeping track of leases, contact information, and key documents is something every rental property investor needs to do. Maintaining those records in the same location as your financials is a convenient time saver and value add.
What you risk without it
If you fall into one of the above categories, but choose not to utilize accounting software or another system, you are at greater risk for the following:
- Spending more time with less peace of mind
A solid accounting and bookkeeping system of SOME kind is essential if you want to do your books efficiently and with confidence. Without a system, how can you be sure you have included all of your expenses in your books? Without some sort of tool or automation, how much longer and how much harder will it be to get ready for tax time?
- Inaccurate books, which could mean paying too much in tax
Without a reliable system such as a dedicated rental business bank account linked to accounting software, you are at a greater risk of failing to include all of the expenses you incurred. That leads to reporting higher than actual income, and ultimately paying more in tax.
- Making decisions based on incomplete data
Incomplete data from inaccurate books can lead to misunderstanding your portfolio's performance, impact on your net worth, and making big decisions without a true picture of your current situation.
Now that we have explored some of the advantages presented by accounting software, hopefully you have a better understanding of how it can benefit you and your rental property business. But if you are still not sure, read on!
You probably need accounting software if:
If you fit in one of the following groups, odds are that accounting software would streamline your rental property financial management and make your life easier.
- You are a new investor with intent to scale quickly
Some new rental property investors want to grow slow and steady, others want to grow as fast as possible. The quicker you want to scale, the more important it is that you have laid a solid foundation and implemented tools and processes that will enable you to easily handle your eventual higher volume.
- You already have a few+ units and are unhappy with your current record-keeping
Fundamentally, everything comes down to having a reliable system that helps you work efficiently and maintain accurate records. If you are frustrated or unhappy with your current system for keeping your rental books, its likely time for a change.
- You want to spend as little time as possible on bookkeeping
Accounting software lets you securely connect to your bank account and import a transaction feed- meaning you do not need to a) remember every rental expense you have incurred and b) you do not need to manually enter that expense somewhere. Less to worry about and less time spent on your books is a win for most investor and rental owners!
You probably do NOT need accounting software if:
If the following descriptions fit, you may not need accounting software.
- You pay someone else to do it
For some, professional bookkeepers are worth their fees and more for the peace of mind and time savings they provide. If your rental portfolio has reached a size and success level that you are comfortable with the expense, congratulations! That bookkeeper will now use some form of accounting software on your behalf.
- You have a relatively small portfolio
Small, long term rental portfolios with relatively few total transactions are the easiest potential bookkeeping scenarios. A spreadsheet and a file storage program can get you most of the way there if you remain diligent and organized.
- You already have a defined system that you understand and is working efficiently for you
But would you be here reading this article if that was the case?
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