Managing your rental property expenses is a crucial aspect of ensuring profitability and sustainability. Keeping track of what you’re spending to operate and improve your property will help you analyze the investment’s financial performance, evaluate your tax obligations and benefits, and make informed decisions that can help you optimize your return on investment (ROI).
If you’re wondering how to track your expenses, we have some best practices to share that are both efficient and effective.
Start with Organizing Your Expenses
The first step in tracking your rental property expenses is to decide what kind of system you want to use. Will you be paper-based or cloud-based?
We recommend using as much digital technology as you can. When you invest in software, apps, and online platforms, you’ll find that it’s much easier to stay organized and you can also integrate a lot of different information. You can sort maintenance expenses, leasing expenses, and the costs for professional services.
Once you have a system in place, gather all relevant documents, receipts, invoices, and financial records. You’ll want to know you can easily access your monthly and annual income and expense records, outstanding payments, and a list of tax-deductible expenses.
Organizing your expenses can make budgeting easier, prevent duplicate payments, and simplify record-keeping.
It’s also important that you don’t commingle your professional and personal funds. This can be an easy mistake, especially if you’re only renting out one or two properties. You don’t want to use personal accounts to pay for rental property expenses. This will only make it harder to distinguish between business and personal expenses. It also complicates your record-keeping and increases the risk of tax audits.
Keep separate bank accounts, credit cards, and other financial accounts for your rental property business. This will allow you to track expenses accurately and simplify your tax reporting.
Which Expenses Are You Required to Track?
If you’re in doubt, track it. You’re better off being thorough. Rental property investors have a variety of receipts and records to keep, and capturing a snapshot of these expenditures not only helps you budget and understand where you are financially, it also helps at tax time. You need those maintenance invoices and mortgage documents to serve as backup documentation when you’re claiming deductions on your taxes.
We’ve created a brief list of the financial records you want to maintain in order to track your rental property expenses:
Resident leases agreements. Hold onto leases even for residents who have moved out. We recommend holding those documents for at least five to seven years.
Any record of costs or expenses that relate to those lease agreements. Commissions that you paid to an agent, for example, when you placed your resident, or court fees that resulted from an eviction would need to be identified and filed.
Evidence of all rental payments received, including any late fees or additional fees such as pet rent or valet trash fees.
Bank statements that are specific to your rental property. Wherever rent is deposited, for example. This will help you track the flow of cash and itemize the property-related expenses.
Copies of utility bills, receipts for materials and labor, and invoices for supplies and other services that directly relate to your rental property.
Professional service invoices from partners such as attorneys, insurance agents, accountants, and property management companies.
Advertising and marketing receipts and invoices. There are likely costs associated with finding and placing a resident for your vacant property. You might have paid a company to conduct screening for residents, there may be fees paid to online parking platforms, etc.
Mortgage documents and records of loan payments made, particularly the interest paid on your mortgage for applicable rental properties.
Property tax and rental tax statements if your city assesses a sales or use tax for the monthly rent collected.
Copies of your federal and state tax returns going back several years.
For tax purposes, don’t forget to track your pass-through expenses and your depreciation, as well. Deprecation is usually a huge deduction for rental property investors. The IRS has decided that the value of most rental properties can be quantified over a productive lifespan that stretches for 27.5 years. The depreciation deduction allows you to deduct a portion of the property over that timeframe.
And, the pass-through benefit allows you to write off the cost of any personal property that you’re using within your rental property.
How the Tracking of Rental Property Expenses Benefits Investors
It’s important to keep a professional record of all your expenses, even if you’re only renting out one property. Whatever your current scenario as an investment property investor, you have to track your rental property expenses accurately and transparently.
Tracking rental property income and expenses helps rental property investors in a few key ways:
There’s expedited and less stressful tax filings
You’re streamlining your process and spending less time chasing down a receipt you misplaced
You’re prepared if you find yourself being audited by the IRS
You can be sure that all of the information that you do submit to the IRS is accurate.
Most importantly, tracking the expenses associated with your investment property will help you understand whether you are earning or losing money on your San Diego rental property. You won’t know you’re bleeding money on maintenance or recurring services if you don’t have a clear snapshot of what you’re actually spending.
Tracking expenses can help you budget. It can help you make smart investment decisions for the future.
This is an important part of succeeding as an investor. Try tracking the expenses that we’ve mentioned, and make sure you’re using a system that works. Invest in new technology if you have to.
When this seems too complex or time-consuming, don’t hesitate to reach out to a San Diego property management company. We’d be happy to help you. Please contact us at PURE Property Management for any assistance you may need. We love helping investors and landlords succeed, no matter where they are in their real estate journey.