For many real estate investors, the start of a new year is the signal to think about filing taxes, but it’s also a great time to review your accounting processes and make any necessary adjustments to get your books for 2023 started right. Use these tips to create a strong foundation for your books, plan ahead for budgets, tenant changes, and unexpected costs, and streamline your accounting processes.
Have a Clear Starting Point
Start your books for 2023 with a strong foundation for your accounting records. Make sure your bank and credit card accounts are reconciled for 2022 so your January starting balances are correct. Remember to record your credit card expenses using the transaction date, not the posting date. This is especially important in January. If you made a credit card purchase at Lowe’s on December 31, but it didn’t post to your credit card account until January 2, that transaction should be recorded as an expenditure for 2022. Fortunately, REI Hub’s import feature uses the transaction date, so your reports give you the most accurate picture of when you incurred costs.
If you make New Year’s resolutions (or even if you don’t!), commit to keeping your personal and business expenses separate this year. But let’s be honest: Mistakes happen and using the wrong credit card is easy when we’re in a rush. If you use business funds to pay for a personal transaction, follow these steps to account for the funds correctly. However, the best practice is to differentiate your personal and business expenses. Getting in the habit now will save you time and headaches for the rest of the year.
Review Reports and Leases
January is a great time to review not only the past year’s financial reports but this year’s tenant and lease updates. Check your leases to see if any rent increases should go into effect this year, and note those dates on your calendar so you can remind your tenants, if needed. As you create the budget for this year, factor in those rent increases.
Review the security deposits you’re holding on to. If you need to return any deposits to tenants who moved out recently, make those payments now to clear them off your books. If the tenants damaged the rental unit, and you are keeping some or all of the deposit, remember to move the funds out of the liability account into your income account as reportable income.
Once your books for the previous year are finalized, compare your year-end financial reports with your budget. Was your budget on target, or did you have significant variances? Investigate any discrepancies and determine if you should integrate them into this year’s budget. For example, if a spike in electricity costs over the summer prompted you to sign up for the utility company’s budget plan for this year, you’ll need to update the budgeted amount to account for the adjusted monthly fees, plus the possible shortfall payment when the utility company reconciles the estimated payments with the actual usage. If your rental property was vacant for longer than you expected last year, you may need to be more conservative with your expected income line for this year or allow for an increase in advertising for that unit when the current lease is up. Budgeting takes time and effort, but by putting in the time up front to review and learn from last year’s budget, you’ll create a more accurate budget that helps you make sound financial decisions this year.
Plan Ahead
No matter how much time you spend on a budget or how carefully you inspect a property, unexpected expenditures will happen. Costly improvements cut into your bottom line, and even small repair bills add up. Planning ahead now will help reduce the financial burden of these unanticipated charges. You’ve already separated your personal and business accounts, but have you set up savings accounts for your rental properties? Having a designated savings account gives you a place to build up a cushion for capital improvements, tax payments, or emergency repairs. Make a habit of setting aside a percentage of the rent each month to put into the savings account. Depending on your state and local laws, you may be able to store security deposits in a savings account as well.
As you update your weekly or monthly schedule, build in time to reconcile your accounts and review reports. Compare your budget with your financial reports each month to make sure you’re not missing any of the transactions you expected. Mail can go astray, and electronic invoices can get caught in spam filters, so if you’re not signed up for automatic payments, you may have missed an invoice and not realized it. By reviewing your books each month, you can catch errors and potential problems sooner. Building review time into your schedule now helps you get in the routine early and avoid possible penalties and late fees.
Streamline Your Methods
Before you jump into your books for 2023, think about how your bookkeeping went last year. What worked well? What parts did you find tedious? Maybe having a designated time to work on your books helped you focus. Or was it time-consuming and irritating to sort through envelopes of paper receipts at the end of the year? Now is the time to fine-tune and streamline your bookkeeping methods so you can benefit from the improvements all year long.
If your paper-based organizational method caused you headaches last year, try going digital this year. REI Hub lets you store digital copies of receipts, invoices, leases, documents, and notes. Just take a picture with your phone or webcam, then attach the file to the transaction. Your documents will be securely saved in the cloud instead of your desk drawer, giving you easy access to records no matter where you are.
If you’re storing your documents electronically, cleaning them out isn’t a pressing issue, but with paper-based storage, space is a concern. As you update your organizational methods, remember to clean out any old, unneeded files. The IRS recommends keeping tax-related files for a minimum of three years after filing the associated taxes and up to seven years, depending on your tax situation. Since litigation with former tenants is always a possibility, keeping records for a minimum of seven years is advisable for most rental property owners. When you’re ready to dispose of unnecessary documents, don’t just throw them in the trash or recycling bin. Financial documents often have sensitive information like your social security number, account numbers, or other personal information you don’t want to accidentally share. Shred your old papers or dispose of them in another secure way.
Setting aside time to work on your books each month is great, but tracking your expenses as they occur is even better. We’re all busy, so it’s easy for us to get sidetracked, then forget about a transaction, especially if we’re waiting for the end of the month or quarter before we tackle our books. Designate half an hour at the start or end of each workday to update your accounts. REI Hub allows you to import transactions, set up matching rules, and use templates to save you time and hassle. Using these more efficient processes for bookkeeping gives you more time to focus on your properties or other businesses.
Takeaways
A new year means you have a new opportunity to improve your bookkeeping processes and give your rental property account books a good foundation. Reconcile your accounts and separate your business and personal expenses to keep your books in shape. Use your leases and last year’s budget and financial reports to help you plan financially for this year. Build time into your schedule to review your accounts regularly, and set up savings accounts for your rental properties to prepare for capital improvements or unexpected expenditures. Take advantage of digital storage options and clean out old, unneeded files. Track your transactions as you go and save time with REI Hub’s templates, matching rules, and import options. With these new habits, you’ll be more efficient and have more accurate and organized books for the new year.
