• Getting Started with Rental Property Accounting

Tracking Your First Rent Payments and Expenses

December 18, 2024 7 min read

How To Track Rent Payments and Expenses

Starting a rental property business is an exciting feat. In the buzz of that excitement, you’ll find yourself constantly overseeing a wide variety of expenses that can be difficult to keep track of. Once you finally receive your first rental property income, it can feel like all of your hard work has finally paid off. And it has! But it’s not time to kick your feet up yet.

It’s important that as this new cash continues to flow in and out of your hands, you keep a close record of it, as this will simplify your life when tax season rolls around. Financial growth is dependent upon organization and planning, and a great way to do this is to optimize your tax deductions at the end of the fiscal year.

Don’t know where to start? No worries. In this article, we’ll discuss some expenses and income to expect, how to classify them, and the most efficient ways to track them.

Rental Expenses

Before we dive in, it’s important to understand what qualifies as a rental expense and what doesn’t. Many rental expenses, when reported on a Schedule E tax form, become deductibles for your rental business. This means by subtracting them from your net rental income, you can reduce your taxable income for the fiscal year. It’s important to keep thorough records of each expense if you want them for these hefty tax write-offs. Rental expenses include, but aren’t limited to:

• Marketing/advertising
• Property maintenance
• Cleaning
• Insurance
• Staff expenses
• Etc.

Start-Up Expenses

Before you even begin making income, you’ll have a multitude of expenses as you set the stage for your business. Start-up expenses, like operating expenses, are tax deductible if your rental activities qualify as a business. They include any expenses incurred before you begin renting out any units, such as wages for trainees, office supplies, website-building costs, advertisements, and more. Not included are interest, taxes, and research/experimental costs.

Operating Expenses

Expenses associated with day-to-day upkeep and maintenance of your rental business are referred to as operating expenses. According to the IRS, they must be 1) Ordinary and necessary 2) Current 3) Directly related to rental activity and 4) Reasonable in amount. They are not capital expenses, which are improvements made to increase the property’s value (new appliances, vacuums, etc.). Rather, capital expenses will depreciate over the following fiscal years, so you can reclaim some of the expense by claiming depreciation deductions.

First Rent Payments

Rent Payments

Your main source of income, rental payments, will be more straightforward. Whether you receive monthly rent payments through cash, checks, electronic means, or through services, you’ll be tracking this income habitually, so it’s important to find a consistently effective way to track and collect rent. You need to provide your tenants with proof of payment (typically either a physical or electronic receipt), and you’ll need to keep up with reporting rent payments for your own records as well.

Security Deposits

The first rental-related compensation that you receive may not actually be a rent payment from your new tenants—you’ll likely first receive rental deposits from them. Security deposits, typically collected before a tenant moves in, are returned to tenants after the lease terminates (given that they leave the property in good condition).

Security deposit storage procedures differ by state, so it’s important to investigate state and local laws to ensure you handle your tenants’ security deposits legally. Some states require you to keep security deposits in a separate interest-bearing account, whereas others allow you to commingle security deposits in with the rest of your funds. Either way, returned security deposits are generally not tax deductible (unless you deduct portions from it for necessary repairs, cleaning etc.), but it’s important to keep track of them nonetheless.

Methods of Tracking

Given these moving parts, you’ll need to learn about tracking rent payments and expenses in a way that best serves you. As mentioned, the more organized you are, the better the tax write-offs for your business. Additionally, if you find yourself in any legal issues, having meticulous reports can help you in settling disputes.

Say a tenant stops paying rent for a few months—your up-to-date records can serve as proof should the situation escalate. Or, if you’re looking for lenders, they may request a look at your records to get an idea of how profitable your business is.

In any case, finding a method that best suits your needs is important, so let’s discuss a few of your options.

1. Rent Ledger

A property managers or landlord may utilize a rent ledger, which is typically a physical or digital record of your rental income and expenses. It includes basic information: rent payments by unit, dates, types of transactions, dollar amounts, and other basics. They can be great for simplified tracking. Building a rent ledger from scratch can be tricky, but there are many rent ledger templates which serve as great places to start.

2. Spreadsheet

Another common way of tracking rental business transactions is spreadsheets. Google Sheets and Microsoft Excel are common places to create a spreadsheet to keep track of rent payments and expenses. With online spreadsheets, you can program cells to automatically do math for you, which can be a helpful timesaver. And, just like rent ledgers, they are very customizable.

Spreadsheets include more or less the same information as rent ledgers, and oftentimes more. With spreadsheets, you can include your rental income by unit as well as the details of your transactions, such as how rent was paid, any incurred fees, etc.

3. Rental Property Accounting Software

A rental accounting solution rising in popularity for its convenience is property accounting software. They’re a great option because they combine many important features into one easy-access place online.

Rental property accounting software allows for seamless financial tracking, including tenant rent payments, security deposits, expenses, and more. They serve as a great way to simplify and automate your books. In other words, they do the organizing and number-crunching for you.

Rental property accounting software can also be integrated with property management software so your finances and tenant information can be stored together without the need for multiple platforms. Property management companies can collect rent payments online, provide receipts for tenants, and track maintenance by tenant or property, all while staying up-to-date and accurate.

The best accounting software for real estate offers automated expense-tracking as well. By syncing your business accounts, property accounting software can generate receipts and keep records of each expense in one tidy place. You can rest easy knowing that all of your records are organized, meticulous, and secure.

Additionally, some of the most comprehensive and best accounting software for real estate can automate your data imports. Ledgre, for example, can import any pre-existing transactions recorded on a spreadsheet and can securely pull transaction data from your bank. This will automatically generate records for your transactions made before the switch—meaning you don’t have to wait until the end of a fiscal year to make the switch. It’s a great solution that grants landlords and property managers more time managing their business and less time micro-managing their finances.

Conclusion

Remember, no matter what method you choose to track rent payments and other rental property transactions, you must keep them updated. It’s best to track transactions immediately so that they don’t get lost in the noise of your day-to-day responsibilities. Find a property accounting option that works best for you and your business so you can spend less time worrying about the minute details and more time growing your rental business.