Rental Property Accounting using Quickbooks Online

[Bruce Weyer]

Does anyone do their own accounting? I'm trying to set up "asset" reserve accounts for Vacancy, repair & maintenance, and cap ex. how do you do this or are you accruing your expenses? How do you save for the expenses that have not happened yet?

[Frank Chin]

The are lots of stuff written on cash vs accrual accounting. 

I spend 90% of my career in Accounting and Credit Management, including visiting clients to check their books to determine how much credit we should extend them, to the other end, calculate the amount of "bad debt reserves" required, and adjusting them when necessary if the bad debts over time is actually larger or smaller than projected.

When I visit clients, many keep two sets of books. One for reporting purposes, usually on a accrual basis. The other one is cash basis, where you see the actual cash coming and going. These companies has full time accounting staffs to handle it, unlike a small time landlord that has a full time W2 job to attend to. You must really like accounting to do two sets of books.

If you start off with one or two tenants, on a cash basis, your income is what your tenants actually paid you. For expenses, it's what you actually paid.

If I start off with, say one tenant, who pays rent of $2,500 month, on an accrual basis, I book the income regardless if he paid or not. Depending on your acumen in selecting tenants. they may or may not pay. Now, if you do accounting on an accrual basis, your not playing around, you expense you bad debts based on your estimation of how the tenants pay, and say your estimate is on the average, your bad debts is 3% or total rents on an annual basis, you picked one wrong tenant, he moves in, pay three months rent, and didn't pay the next six (actually happened to a landlord friend), which is how long it takes you to evict him. If you're a small time landlord, and you only have a handful of clients, figuring out reserve for bad debts is hit or miss at the most. Then, you wind up paying taxes on rents you never received.

For larger operations, where we have hundreds of customers, and we have experience with the type of business we're dealing with, figuring out bad debts reserves is statistically a lot easier than someone owning just six rentals. One year, when I had about 12 tenants, three of them fell behind for a few months. Then vacancy was above normal when these tenants left and I had to rehab the place Normally, I do well enough that maybe one tenant had trouble. In this bad year, had I been on an accrual basis, I have to rack my brains out and adjust the reserves, and wind up paying taxes on what was not collected. With cash accounting, I just add up all the rent checks collected, and booked, and I'm done. 

I remember when I was with the large trading company, it was a bad year, a few of our large customers didn't pay. We had grueling management meetings where they want to up the reserves, and deduct more for bad debts, considerably more. I objected, because I knew the customers, and convinced management not to expense so much. The result was we were able to report a profit for the year, not a loss, and management received bonuses. Then the following year, the customers paid in full, so it turned out they were wrong, panicked, reserved too much, and I reduced the reserves, and took the money back into income. Management was so thrilled I received a large bonus.

Now, for my real estate business do I really have to do all that? Should I spend my time juggling the hypothetical income and expenses, or is my time better spent on going around finding deals. In the last real estate crash here, I go to RE auctions every week, instead of figuring out why my accruals are all wrong. I was able to purchase properties $100,000 below market, instead of playing with reserves.