Financial reports indicate the health of your investment. They tell you how well (or how poorly) your rental property is doing. As a property investor or landlord, you need to keep track of the financial condition of your rental property so that you can make cuts where necessary. When your finances are handled properly, you can maximize the earning potential of your property.
Here are 7 important financial reports that you or your property manager should prepare every month:
#1 Balance Sheet
The balance sheet provides a monthly snapshot of your rental property’s financial position — that’s why it’s also known as the “statement of financial position”. It reports the assets, liabilities, and equity of the rental property at a certain point in time. It is called the “balance sheet” because the assets will always be equal to the sum of liabilities and equity.
- Assets generate cash flow and increase the value of the company. It includes cash, land, buildings, equipment, furniture, fixtures, machines, and much more.
- Liabilities include money that you owe to outside parties. They include mortgages, accounts payable, loans, warranties, accrued expenses, and much more.
- refers to the investment property’s assets minus liabilities. It is often referred to as the “shareholders’ equity” and reflects the amount initially put into the investment.
In the balance sheet, you can find your actual balances, security deposits, sums owed to creditors, and more.
#2 Income Statement
The income statement or the “profit and loss” statement describes the rental property’s cash flow. It is usually prepared monthly, quarterly, and annually. In property management, the income statement itemizes the expenses incurred and compares them to the budgeted goals. As its name suggests, the income statement reports how much profit a given property managed to generate over a given period.
It contains information including:
- Income, such as:
- Interest received
- Investment income
- Tax credits
- Property management fees
- …and more
- Expenditures, such as:
- Legal fees
- Advertising and marketing costs
- Accounting fees
- …and more
#3 General Ledger
The general ledger describes the individual transactions that can be found in the balance sheet and the income statement. It records the investment property’s transactions and classifies them as liabilities, assets, revenue, expenses, or owner’s equity.
Its purpose is to provide you with an overview of your rental property’s transactions. It acts as a “master list”, hence, it should be prepared with utmost accuracy and detail in mind.
#4 Accounts Payable
The accounts payable report reflects your short-term debts and financial obligations over a given period. It helps property owners make sure that they’re making payments to the correct vendors. In addition, it guarantees that the property owner isn’t carrying delinquent accounts. A delinquent account is one that has not been paid even though its due date has already passed.
These may include payments such as:
- Replacement parts
- …and so on
#5 Tenant Accounts Receivable
This report allows property owners and property managers to manage the amounts that are receivable from tenants. It includes rent, late fees, utility payments, pet deposits, security deposits, and more. Essentially, it summarizes the delinquent accounts of individual tenants.
#6 Monthly Bank Statements with Reconciliation
Monthly bank statements with reconciliation are adjusted financial statements that reconcile the rental property’s accounting records with the landlord’s bank records. It ensures that the figures reflected on the bank account are also reflected on the general ledger and balance sheet.
#7 Rent Roll
The rent roll provides information regarding the future of the rental property. It makes accurate predictions based on the property’s current financial position, taking into account factors such as renewal rates, revenue generation, gross scheduled rents, and much more.
Preparing a rent roll allows you to make informed decisions about your property. It applies to all types of investment properties, including single-family homes, multi-family buildings, commercial properties, shopping centers, office buildings, and more.
The rent roll isn’t a mere financial report — it may also be used to calculate the net operating income (NOI), gross rent multiplier (GRM), and internal rate of return (IRR).
Accounting Tips for Property Management
Having an efficient accounting system in place lets you monitor the “health” of your investment property. It allows you to keep track of your expenses, see how much you’re making, and much more. Here are some tips on how you can practice efficient accounting for your rental property:
#1 Create a Separate Business Account
Whether you’re managing two or twenty rental properties, you should always store the money that comes from them in a separate account. This allows you to track your expenditures easier and ensures that the money you use comes from that account, and not your personal account.
#2 Track Deductible Expenses for Your Taxes
Property owners benefit from several deductible expenses, including legal fees, property management fees, legal fees, travel expenses, insurance, cost of repairs and maintenance, and so on. Deducting these expenses allows you to significantly reduce your taxes.
#3 Itemize and Document Your Expenses
Although you may benefit from several deductions, you need to provide documentary support for your claims. This means accurately itemizing and documenting all of your expenses, such as supplies, utilities, advertising, cleaning, and so on. In the event that the IRS audits you, you’ll be able to prove that your deductions are legitimate.
#4 Hire a Property Management Company
If you don’t have accounting experience, we strongly advise you to hire a real estate accountant or a property manager. Preparing financial statements is a tedious and time-consuming task that can become stressful, especially when it’s almost time to file your taxes.
The seven financial reports can help you understand your rental property’s financial condition. By constantly monitoring your income and expenses, you can continue to make informed decisions about your property.
It helps to have a reliable property manager by your side who can help you manage your books and your property at the same time. Luxury Property Care has a fully-equipped team of in-house accountants and property managers who work side-by-side to ensure that your investment offers the highest possible returns.