A lot of things can go wrong in rental property accounting. Since you’re dealing with multiple transactions, income, expenses, etc., you’re more prone to making mistakes, especially if you don’t have accounting experience. In this article, we take a look at some of the most common accounting challenges that you may encounter as a rental owner and what you can do to mitigate them.
Challenge #1: Rent Collection
Collecting rent seems easy, but it’s one of the most common problems faced by South Florida landlords. Even with a strict tenant screening process and clear contract terms, some tenants still won’t pay their rent on time. When this happens, your cash flow will suffer.
But have you ever wondered why some people pay their monthly rent late? One of the main reasons why tenants fail to pay their rent on time is the inefficiency of rent collection methods. To this date, many landlords still collect paper checks even when their tenants prefer more convenient ways to pay.
The obvious solution would be to transition to online payments. This motivates tenants to pay promptly and in full and saves you and your property management firm valuable time. It also increases tenant retention as today’s tenants are accustomed to modern conveniences.
Challenge #2: Misclassifying Costs
Another accounting challenge is incorrectly classifying the costs associated with running a rental property. As a real estate investor, you will have to incur various costs such as repair costs, maintenance costs, insurance, and so on. However, without an accounting background, you’re more likely to make the big mistake of misclassifying your costs.
The solution is to maintain clear records, including a chart that catalogs all of your rental business’s assets, liabilities, income, etc. That way, you can have a bird’s eye view of your accounts and be able to access them whenever necessary.
Challenge #3: Maintaining One Account
If you only have one bank account, you’re making one of property management’s biggest mistakes. You should never store your rental property’s funds in your personal account – you’ll only have a headache as you try to backtrack your transactions. And when tax season rolls around, you’ll be scrambling to separate personal from rental-related finances.
For that reason, you must open an account solely for your rental business. If you own more than one rental property, you could even open separate accounts for each one.
Bear in mind that if you plan to collect a security deposit, you may need to open an account for security deposits only. In some states, the law requires landlords to store security deposits in escrow accounts. Consult a property management company in South Florida as to what specific laws apply to your property.
Challenge #4: Not Recording Maintenance Works
Many landlords don’t think they need to maintain detailed records of maintenance. This is a mistake. While it can be a time-consuming task, it’s something you must do, otherwise, you may be in trouble in case you’re audited. This is particularly true if you try to claim tax deductions for maintenance costs but can’t provide the Internal Revenue Service (IRS) with evidence. Accurate records can also come to your rescue in case of disputes, such as when a tenant claims you didn’t conduct maintenance.
Use accounting tools to store records of, receipts, invoices, and so on. Another option is to partner with a property management company that can do the record-keeping for you.
Challenge #5: Keeping Only Paper Records
It’s risky to keep only paper records. What if you misplace them? What if they’re destroyed in a flood? When your records go missing, you’ll have a hard time balancing your books. Years ago, landlords had no other choice but to keep paper records, but today, you have no excuse not to create digital copies.
When you receive invoices, receipts, etc., make sure to immediately scan them and store their digital copies on file-sharing sites such as Google Drive. That way, you can access them at any time and easily share files with your property management firm. You can also rest assured that in case your paper documents do get lost, you can still rely on your digital copies.
Challenge #6: Reconciliation
Reconciliation is when you compare two sets of records to make sure they match. It confirms whether or not the contents of the general ledger are consistent with other financial records. Any inconsistencies could indicate that certain transactions were incorrectly entered, unaccounted for, or duplicated.
Since reconciliation can be time-consuming, landlords tend to avoid doing it and end up reconciling their accounts at the end of the year. The problem with this is it can be a headache to try to reconcile your accounts all at once, plus you’ll be pressed for time. That’s why you should reconcile your accounts monthly or hire a professional property management firm to help you with it.
Challenge #7: Not Paying HOA Fees
Is your rental property in a community with a homeowners’ association (HOA) or condominium owners association (COA)? Don’t forget to pay your HOA or COA dues. Whether you or your tenant is covering the costs, you have to pay on time, otherwise, you will be charged a hefty fine. In some cases, your association can even file a lawsuit against you for forgetting to pay your fees.
The solution is to set reminders for when association fees are due. Some associations collect the fees by month, but you can ask if you can pay them in full (HOA fees range anywhere between $100 to $1,000).
Challenge #8: Not Setting Up an Emergency Fund
As you prepare your property management budget, remember to factor in the emergency fund. It’s important to prepare for unexpected expenses so you don’t have to pay out of pocket. A good practice is to set aside a percentage of your monthly rent and put it into your emergency fund.
Navigate Property Management Accounting With Luxury Property Care
Whether you’re a first-time or seasoned rental owner, it’s vital to partner with professional property managers who are well-versed in real estate accounting. That way, you can let go of the accounting challenges and protect yourself from potential liability. While professional property management is an extra expense, the value it brings to the table will make it worthwhile.
Get the help you need to navigate the ever-complex world of accounting with Luxury Property Care. Our in-house accountants are prepared to help you with your finances. Dial (561) 944 – 2992 or complete our contact form to discuss your property needs with our dedicated team today.
