It is not possible to know where to go without knowing where you are. This sentence is valid in real estate investments as well as in many fields of life. If you want your plans about real estate investments to conclude correctly, you should control cash flow regularly. This is possible only if you keep your rental income and expense records. Well, how is rental income and expense record kept? How is profit analysis made and what should we need to be careful about? All is in our article.
Description of Rental Income and Expenses
Your individual property or rental income and expenses of your real estates, which you purchased with investment purpose, are specially about taxation subject. For this reason, calculations should be made correctly.
Rental income is a type of income which is obtained as a result of renting a property. However, there might be different income types that exist due to renting apart from the rent itself. These can be listed as follows:
- >>> Prepaid advance rents
- >>> Rent cancellation prices
- >>> Maintenance and repairs made by tenant
There is a situation that a deposit can be considered as income or not. If deposit will be returned to renter at the end of lease contract, it is not possible to accept this as rental income. In such cases, deposit is added to balance sheet as an obligation. But, in some cases, it is possible for deposit to turn to rental income. These cases are:
- >>> Using deposit to compensate any loss which is because of renter
- >>> Leaving property before the end of lease contract
- >>> Using it to pay the last month’s rent
In case of these situations, deposit is also accepted as rental income. Then, rental income and expense record is added into it.
Rental expenses can be described as expenses made for real estate which is rented. These can be listed as follows:
- >>> Real estate tax
- >>> Encumbrance interest payments
- >>> Operational expenses such as maintenance, repair, environment management
- >>> Travel expenses which are made to visit the property
- >>> Depreciation of the property
In case of renting a real estate with profit purpose, there is a situation that rental expenses are higher than rental incomes for some reasons. Negative net income occurs in case of an absence in finding a tenant for property which is rented. Business expenses are paid even rental income is not obtained. In such situations, when rental income and expenses are recorded, it is seen that expenses are much more.
How Are Rental Property Records Kept Correctly?
Rental income and expense records should be kept carefully. It has some reasons in itself. Firstly, accuracy of your records provides you to see in which situation you are. So, you can develop new strategies by taking your general situation into account. The other important point is easiness of requesting deductions and returns which are your rights to have. And you do not face any problem during an audit. There are 2 different categories in rental income and expense record. These are:
- >>> Income and expense in a detailed list
- >>> Documents that contain factors which support reported income and expense record
What Are the Types of Rental Property Record?
There are many records that you should keep for rental property. If you keep these records for the first time, mentioned situation can be surprising for you. Rental income and expense records which should be kept are:
- >>> Property management contracts that show account opening and monthly prices
- >>> Closing documents and settlement declarations with property basis determination for depreciation
- >>> First billing from public service companies for security deposit follow-ups
- >>> Payments made to lawyer, accountant and property management company
- >>> Copies of the rents which cover at least the last 3 years
- >>> Amount and date of the rents which are received from renters
- >>> Expenses about rentals from assurances, application prices, commissions and legal costs for release types
- >>> Receipts about the expenses that are made directly about the rented property
- >>> Bank account and their statements which are arranged specially for the rental property
- >>> Advertisement, marketing and rental preparatory expenses
- >>> Other credit payments and Form 1098 which is used for submission of the encumbrance documents, real estate tax evaluation, encumbrance tax
- >>> Copies of the tax declarations which cover the last few years
Aforementioned rental income and expense record here can challenge regular investors. If you have more than one real estate, it will be more appropriate to hire an employee or get professional help.
How to Track Rental Income and Outcome Registry?
It may be tiring to handle many documents related with rental income and outcome registry. At this point, some people prefer using platforms and software like Google Sheets and Excel. Yet, some others believe that it is not necessary to reinvent the wheel and use some free online systems.
There is different accounting software available to keep real estate records. Some featured ones are Quicken, FreshBooks, TurboTax, QuickBooks Online, Xero and Wave. Software here makes it very easy to keep mentioned records for people who are good at using them.
It may take some time to get familiar with these software products. Before purchasing one of these ones or another one, make your own research. Ensure that the software you selected meet all your expectations. At this point, it will be easier for you to learn the software you selected with a free demo.
When you get the demo version, create a hirer account and record incomes and outcomes for one and multiple real estates. Then, create monthly and yearly financial statements. This way, you can figure out if the software works well or not. Additionally, you can form an opinion about the use of that software. You can use any of these software products for rental income and outcome registry.
Software Specific to Real Estate
Another option is software products prepared especially for real estate business. With these products, you can automatize income and outcome tracking. This way, financial performance of a rented real estate can be managed in a more effective way. With ease of use and ability to meet expectations, special software products are advantageous.
Read Also: When is the Best Time for Property Investment?
Income and Outcome Records to Be Kept
The best system for rental income and outcome recording is the one that enables financial performance tracking, financial performance improvement, that makes it possible to create income tables and tax statements. In case of an audit conducted by any related governmental institution, it is requested from you to prove that your tax statement has correct information. For this, an auditor may request related invoices and receipts. Therefore, record must be kept for any document that may be requested by an auditor.[*]
How to Make Profitability Analysis of a Rental Real Estate?
With correct rental income and outcome recording, a property can be easily analyzed. Gross income, net income and cash flow found on worksheet are use in analysis. Except these, the following items can also be used in rental property calculations:
- Net Income: Calculated as total income minus all expenses other than encumbrance payment.
- Value Rent Ratio: Calculated as approximate value of a property divided by annual rental value.
- Cap Ratio: Calculated as net income divided by property value.
- Gross Rental Factor: This makes it possible to measure property price against annual rental income. It is used in potential profitability calculations of similar properties in the market.
- Cash Flow: Calculated as rental income minus expenses, including encumbrance.
- Return on Investment: Makes it possible to measure annual return of an investment.
- Cash on Cash Yield: Measures cash flow based on invested cash amount before annual tax. Varies depending on down payment during financing and the cash amount invested.
Rental income and outcome registry must be recorded carefully. Any mistake and negligence here will cause different problems. Such cases may cause difficult situations for you during audits as well as they may prevent you from seeing your actual status. Our company has been offering its services in real estate and accounting fields for a long time. With our expertise and experience, we can keep your records professionally and in a transparent way and accordingly, you can prevent any potential problem in this topic. For more detailed information, contact us.
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Igors Krumins continues his activities as a commercial and international lawyer within the body of “Jurmala Invest”. He has more than 10 years of experience, especially in the investment sector, and has provided consultancy services to numerous companies with his legal expertise. He successfully completed his undergraduate studies at Baltic International Academy and graduate studies at Latvijas Universitate. Apart from his native Latvian language, he can also speak Russian and English fluently.