An Accounting Hack for Landlords So Easy, Even a Non-CPA Can Do It

by | BiggerPockets.com

After my showing on the BiggerPockets Podcast last fall, I had many people reach out to me and ask to further explain my accounting system hack for small landlords. Instead of continuously replying to everyone individually, it dawned on me that this would make for a great article.

This system is for the small landlord. At a certain point, you will simply need to upgrade to a cloud-based accounting software to properly keep tabs on your portfolio’s performance. You will likely scale to a point where you will need to hire a bookkeeper or outsource your accounting. But until that point, this system will work wonders.

The entire idea is to simplify and consolidate your transactions. I’m sure you’ll agree that if all business transactions appear in one place, they will be much easier to keep track of and reconcile at year-end.

I personally use this system to track and manage my two 3-unit properties. Trust me—it’s so easy, even a non-CPA can do it!

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Set Up Separate Bank Accounts Per Property

The key to mastering this system is to understand what we are trying to do. The entire purpose is to consolidate your transactions into a handful of bank accounts. Ideally, we’ll set up a bank account per rental property and make sure all income and expenses related to the property flow through the property’s bank account.

When we do this, your job moves from the retroactive “darn it, I can’t remember which property this expense related to” toward a proactive “I’m about to pay for an expense related to property A; let me make sure this hits property A’s bank account.” This small shift will lead to phenomenal impacts on your accounting system and year-end financial compilation process.

How many of you scramble at year-end to compile records for your CPA? Further, are you the person sifting through personal bank and credit card statements trying to remember if a transaction was personal or business-related?

Setting up a bank account per each rental property will work wonders for you. At year-end, you’ll be able to download your bank transactions to a MS Excel file and easily piece together a P&L. As long as you ensure all transactions flow through the respective property’s bank account, you won’t be burdened with chasing down receipts at year-end to remember what a certain expense related to.

It’s important to note that your bank accounts do not need to be business bank accounts unless the property is owned by an LLC. Personally, I use Capital One 360, and I can create a large amount of accounts for free, no extra charges involved.

landlord-lessons

Related: 4 Bookkeeping Best Practices to Save on Taxes (& Survive Audits!)

Keep Tabs on Your Expenses and Reconcile at Year End

The beautiful part about this system is that all you need to do is be cognizant of which bank account (or debit card) you use to pay for expenses. If you do this correctly, you won’t have to worry about your accounting until year-end, and it will be super easy to complete.

I will be the first to admit that staying on top of your transactions is harder than it may seem. Regardless of how meticulous you are, there’s no doubt that you’ll miss expenses. Here are a few tips to help minimize the amount of missed and improperly recorded transactions:

  • Place some sort of indicator on the debit cards you have per bank account to tell you which property it belongs to. I’ve written the property address in Sharpie on mine.
  • Use self-checkout so that you don’t feel guilty when you check out multiple times at once. And yes, I am THAT guy in the checkout line who will go through several separate purchases at one time to make sure everything is accounted for correctly. I don’t care what anyone thinks—I have a business to run!
  • Use a smart phone application to snap photos of receipts and upload them in real time. See if your CPA offers anything like this. My firm’s client portal has a smart phone app for my clients so that they can directly upload supporting documents to their folder. If you don’t have access to something similar, use Expensify.
  • If you accidentally pay for an expense out of your personal account, simply transfer money out of the respective rental account and into your personal account. By transferring money from your rental property’s account and into your personal account, you will, in effect, see an “expense” when you reconcile your bank statements at year-end. For the transfer’s memo, input a brief description on what the expense was for.
  • Remind yourself everyday via a sticky note or some other indicator that keeping track of transactions on an ongoing basis is important (seriously, do this).

As you can see, this isn’t monumental stuff and doesn’t require using crazy new technology. We just want to track our transactions consistently and accurately.

The reconciliation should be much easier if you can get all of your transactions to show up in the correct bank accounts. By the way, “reconciliation” means using two sets of records to create a Statement of Profit and Loss (P&L) and ensuring that it is accurate. You may use your bank statements and compare those to your Expensify account. Or your bank statements can be compared to a running log of your expenses in Excel. The point is, you’re going to use your bank statements, which further emphasizes the importance of making sure the bank has accounted for all transactions.

My bank allows me to download an Excel file with all of my transactions per account. If you do a good job at making sure every transaction related to the property flows through the property’s account, this Excel file will be extremely easy to clean up.

When piecing together your P&L, you will want to categorize income and expenses in the following manner:

  • Gross Rents
  • Refunds from Tenants
  • Advertising
  • Auto & Travel
  • Cleaning & Maintenance
  • Commissions
  • Insurance
  • Legal and Other Professional Fees
  • Management Fees
  • Mortgage Interest
  • Repairs
  • Supplies
  • Taxes
  • Utilities
  • Phone
  • HOA
  • Bank Fees
  • Other

Because you’ve done a great job all year making sure the property expenses flow through the property’s bank account, all transactions will be ready for you to easily categorize. By categorizing transactions in the manner listed above, you’ll be matching IRS Schedule E, and you’ll have a beautiful final P&L product that will make your CPA cry tears of joy.

budget

What Records Should You Keep?

A sub-process to this strategy is record keeping. You’ll notice I mentioned that you should download and use a smart phone app to digitize your invoices and receipts. The reason for this is twofold: (1) ongoing record keeping will reduce the need to retroactively find invoices and receipts and (2) digitizing invoices and receipts allows you to store them on your computer or the cloud in an organized manner that makes sense for you and whomever is providing you with accounting services.

Related: Accounting Practices for LLCs: What Every Real Estate Investor Should Know

All receipts over $75 should be kept per IRS standards; however, receipts do not need to be kept in a hard copy format. Digitizing the hard copy receipt will grant you permission to throw the hard copy out. And let’s be honest, hard copy receipts just add to all the clutter that’s already invading your office. Get rid of them!

There are two categories I always recommend keeping receipts for, even if the amount is less than $75: (1) meals and entertainment and (2) travel. While you will be technically correct if you only keep receipts for expenses over $75, these two categories are high focus during IRS reviews and audits. I just want to make sure your bases are covered.

If you are flipping/developing property, you should always have a W-9 on file for each contractor that you expect pay in excess of $600 before they start working on your property. This allows us to issue them a 1099 at year-end rather than having to scramble to find out the relevant information we need. If you don’t have a W-9, making sure all transactions pass through a certain property’s account will be the least of your worries.

Some of you may be thinking, “No way my contractor will issue me a form W-9,” and we all know the reasoning for this. If that’s the case, stop using the contractor, or if work hasn’t begun, don’t use the contractor. I tell my clients to literally insert a clause about a W-9 into any contract with contractors. Something like “a W-9 is required to be issued to me (the client) prior to work beginning or this contract is null and void” will do the trick. Speak to an attorney to iron out the details, but don’t let someone start working on your property if they won’t issue you a W-9.

I recommend against letting them start work without a W-9 for two reasons. The first and most important is that you have your business to protect. Do you know the penalties associated with the non-issuance of a 1099? They’re steep. Really steep. And the penalties accrue as time goes on. So if you get audited five years from when you should have issued a 1099, all I can say is ouch. The second reason to not let someone work on your property until they issue a W-9 is purely centered around the thought that you probably shouldn’t do business with someone who can’t meet an easy documentation requirement. There are contractors out there who do great work but run a shoddy business. There are also contractors who do great work and run an airtight business. Which would you prefer to work with?

Summary

It’s really that simple. Set up a separate bank account per property. Make sure each transactions flows through the appropriate bank account. Reconcile at year-end and categorize each transaction, and you’ll have a P&L that was easily put together. Low stress = happiness.

Additionally, you will have built a habit of regularly thinking about how to account for various expenses. This will work wonders for you as your portfolio grows.

How do you currently account for your real estate-related expenses? Will you consider using this system?

Let me know your thoughts with a comment.

About Author

Brandon Hall

Brandon Hall, owner of The Real Estate CPA, is an entrepreneur at heart who happens to be good at taxes. Brandon is a real estate investor and CPA specializing in providing business advice and creative tax strategies for real estate investors. Brandon's Big 4 and personal investing experiences allow him to provide unique advice to each of his clients. Sign up for my FREE NEWSLETTER to receive tips and updates related to business and taxes.

17 Comments

  1. Brandon, a separate bank account and debit card for EACH property is just plain stupid. If you have 10 properties, that means 10 bank statements to reconcile each month, 10 debit cards to keep track of, etc. Each time you get a rent check, you have to get it deposited into the correct account. I have 40 properties. I have two bank accounts. I have one large national bank ( Chase) that has branches on every street corner. Makes it real convenient. The small community bank that still issues me loans wants me to do as much business banking with them as I can, so I have an account with them.

    The better solution is Quickbooks. I have two companies set up with QB. One for my rentals and one for my flips. Each property is a separate “customer”. I enter every rent deposit into QB. Takes about a minute per day. Every check or better yet computerized bill pay is entered into QB at the time I make the payment. Send the payment, enter it in QB. Takes 5 seconds per payment. One business credit card for repairs and what not. Home Depot card.

    My dream is to one day have all rent received by Chase Quick Pay ( other large banks have similar programs). My renter sends me the money electronically. I know who it is from and can enter the deposit into my Quickbooks the next morning. I pay almost all bills electronically, so I rarely write checks.

    You can customize reports to see exactly how each property is performing. That is far simpler and more illuminating than looking at monthly bank statements.

    Keeping track of multiple bank accounts is time consuming. Good for you that you seem to have no or low minimum balance requirements. God Forbid you make a mistake, the fees will quickly kill you. That’s the problem with multiple small bank accounts.

    At the end of the year, I turn over my Quickbooks files to my CPA. The depreciation and what not on multiple properties is just too much work. Every year they come up with a good idea for me and my business.

    I agree with the rest of your article, especially the part about giving contractors 1099 Forms.

    This is not a commercial for Quickbooks. There is other business software out there, including some custom made for rental property. If you like the other brand, use that. I just feel the book keeping part of the business is pretty easy, and your advice makes it real hard.

    • Brandon Hall

      Gary – I addressed scaling in the second paragraph:

      “This system is for the small landlord. At a certain point, you will simply need to upgrade to a cloud-based accounting software to properly keep tabs on your portfolio’s performance. You will likely scale to a point where you will need to hire a bookkeeper or outsource your accounting. But until that point, this system will work wonders.”

      Small does not equate to 40 properties. Of course it won’t work for you! That would be an absolute nightmare. But if you had 3 or 4 properties, this system is easy and free (no software costs). For a small landlord, it makes perfect sense.

      I’m sticking by my guns 🙂

      • Thanks, Brandon no worries. I still consider myself a small landlord! Looking to grab another 10 or 15 more. Oh, full disclosure: I was an accounting major in college and many years ago passed the CPA exam. Maybe this stuff is second nature to me.

        Accounting is Easy.

        Dealing with Renters. Sometimes not so much.

        Thanks for the article.

    • Brandon Hall

      Awesome question. Pay for it via a personal account and have each property reimburse you equally.

      So you spend $2,000 across two properties equally. Property Bank Acct A pays you $1k and Property Bank Account B pays you $1k. Now on each bank statement, you’ll see an expense of $1k per property (it’s technically a transfer but you get what I’m saying).

  2. Do you issue 1099’s for maintenance/repairs or rental properties. I thought that rule was going to be put in place in 2012 but it was then repealed (?). If a rental property has a large item like a furnace installed would the contractor be issued a 1099? If so what would that 1099 look like (breaking down materials and labor?). Thanks!

  3. Alex Sanfilippo

    Great post! This is super practical. Very useful information! Thank you. I love this one:

    “Use self-checkout so that you don’t feel guilty when you check out multiple times at once. And yes, I am THAT guy in the checkout line who will go through several separate purchases at one time to make sure everything is accounted for correctly. I don’t care what anyone thinks—I have a business to run!”

    Thanks again for the wisdom today! I will certainly be applying what I learned here today.

  4. Charles A.

    I agree with Gary.
    Quickbooks is the way to go.
    All my tenants pay directly via the quickbooks invoice I email to them every month.
    Like clockwork.

    My next step is to figure out how to import contractors invoices before paying them.

    That would make life so much easier than it already is.

    And I only have 12 doors .

  5. Christine Thilmony

    Can you share where the IRS code states that you don’t need to keep receipts under $75? I was told by my accountant that we needed to keep all receipts including the ones under $75, but it would be a lot less scanning if we didn’t…
    Thank you so much!!!

  6. Isaac Rothermel

    Thanks for the information. I do all my banking through Capital One 360, as well, and midway through your article set up a separate bank account for each of the units in the single duplex I own. Previously I had them together. Capital One only allows you to have a maximum of three checking accounts in a personal account. Did you come up with a workaround for that?

  7. James Barnhart

    Thanks, Brandon,
    As a small landlord, your method could work fine for me. I appreciate you posting your article.
    But, I still think I will keep one rental bank account, and a separate Excel spreadsheet for each property. That keeps it simple for me. I guess I just missed why keeping the different rentals bookkeeping spreadsheets separate isn’t enough. What did I not understand?
    I look forward to reading your newsletter.

  8. James Green

    Brandon great article.
    I know you are not a lawyer, but in regards to your statement – “..It’s important to note that your bank accounts do not need to be business bank accounts unless the property is owned by an LLC. ” My question is shouldn’t we own all of our properties in some type of LLC for asset protection, just in case somebody slips & falls & decides to go after us?

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