Accounting for a dummy - how do I keep track of my first rental?

Question

Accounting dummy here.  Not that it's any excuse, but as a young guy with very few expenses I haven't felt the impetus to keep track of my personal finances in any way other than the resources provided through my online banking.  Taxes usually take me about 20 minutes to complete because I'm just . . . simple.  As such, I'm completely lost when it comes to accounting.

In a few days I'll close on my first rental and I want to have all my ducks in a row.  What would you all recommend?  Just start listing expenses and rental incomes in an excel sheet?  Is there a free software that would work for me?

Thank you all!!

-Ryan

Daniel Chang · Answer

You have 2 issues.  Not only is your accounting life going to get a lot more complicated from having a rental, we are also at the end of the calendar year.

You need a professional.  I'm not talking H&R Block.  Get a CPA, preferably one that does real estate.  For instance, it isn't as easy as keeping track of income/expenses.  With your closing costs, do you know which one you can directly expense, and which one you need to amortize over the term of the loan?  Same thing with improvements, which to deduct and which to capitalize?  Can you deduct mileage if your travel to/from the property?  Do you know how to depreciate your property over 27.5 years?

None of the above is hard, but will take you time to learn.  But given that you need to have your books ready in 2 months for tax season, I'd recommend hiring a professional.

Congrats on your 1st rental!

Ned Carey · Answer

The number one thing you need to do is keep track of every bit of business income and expense.  You can do this in Excel. If you have it organized in Excel your accountant can do your taxes. He or she can deal with all the things you don't understand.

You also need to keep receipts. That is a new habit you are going to have to develop.

Ultimately you should take the time to learn the basics of accounting. I still don't  understand credits and debits. But I don't need to know that to enter information in Quickbooks.

Accounting is not just for your taxes. You need proper accounting to know whether, from where and how much you are making on your business.

Michael Boyer · Answer

Ryan, good idea to think of this early and I like the theme above to keep it simple.... Just to add to the advice above, spend some time with the IRS Schedule E (don't worry, it is fairly simple)

Just glance at it a few minutes. Notice the categories and the format..

This will help you "begin with the end in mind" (to quote Covey) as a key reason you will be tracking this information is so you (or your accountant) can do your taxes properly (but also great info to track to help you assess your expenses and financial performance).

Seeing the actual Schedule E form you will fill out with your 1040 may help give you ideas on filing, the system, its organization (by area of expense for example, or all in one place) should you go with Excel, old school folders, or some other format that works for you.

With one rental, the top line income should be pretty clear (the monthly rental amount x months rented), plus you can simply deposit the money in the same account (so the bank does some accounting for you). The expense side can entail some tracking (but, again, using one credit card when possible outsources that). I find the receipt tracking do-able with a few rentals for the past decade...

One tip from my experience is to have any spouse or partner on the same page; otherwise,if they a pay a bill and don't give you the receipt or file it, you can miss it at tax time...

Best of luck....

Lisa Ryan · Answer

I don't know of any free softwares, but I think excel can handle everything  you need it to.

Bookkeeping 101: assets increase with a debit, liabilities increase with a  credit. Expenses increase with a debit, revenues increase with a credit. Record journal entries for all transactions - treat your rental like a business.

When you receive rent, debit cash, credit revenue. When you pay a repair, debit expense, credit cash or accounts payable.

Probably would be a good idea to read a quick book about journal entries or do some searches on the internet.

At the end of the day, just be sure to keep a record of all expenses so when you're doing your taxes you don't give back unnecessary money.

Daniel Chang · Answer

@Ryan Moran

I recommend you get an accountant now, for a few reasons:

- Jan - Apr (tax season) is the busy time for accountants.  It's harder to find one that will sit down with you and go over things

- The benefit of having an accountant is not from getting your taxes done.  It's from tax planning.  Knowledge is power.  If you are unaware of something, you won't know to keep track.

- Just like any professional, it may take you awhile to find someone who's the right fit for you.

Ryan Moran · Answer

@Daniel Chang That's a good point.  You think I should go hire one right now? Or wait until tax season? Is there any benefit of doing it now versus just tracking it all myself then hiring a CPA come tax time?

-Ryan

Ryan Moran · Answer

Wow, thanks for the quick responses!  That's roughly what I was expecting.  Just trying to avoid a big blunder.  I'll probably search around for an excel format so I don't spend a bunch of time reinventing the wheel.  Thanks!

-Ryan

Account Closed · Answer

Here's a blog post about keep receipts from the other day. You can take pic with your phone and use evernote with tags to keep them without the paper.

https://www.biggerpockets.com/renewsblog/2015/11/0...

Excel should work. You just might need some assistance calculating depreciation. don't forget to break out your mortgage payments between principal / escrow / interest.

If you are looking to try some free accounting software, check out Gnucash.

Dean Harris · Answer

I am a CPA and Certified QuickBooks Proadvisor. With only one property you can certainly get by with just using Excel. But if you plan to add multiple properties and create a REI business then you are going to want to make your life easier by using a software solution like QuickBooks. And when it comes time to file your taxes, you can run the necessary reports from QuickBooks and give them to your tax accountant.

Accounting for a dummy - how do I keep track of my first rental?

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