Summary: Real estate bookkeeping is so much more than recording financial transactions in a ledger. In fact, real estate bookkeeping is the real MVP for speeding up your journey to financial independence. When you set up your books the right way, you’ll be able to increase the cashflow of your properties in strategic, focused ways.
Which type of rental business owner are you?
- Hands-off: as long as your renters are paying their rent on time, you’re content.
- Hands-ON: even if your renters are paying their rent on time, you never stop looking for ways to increase the cashflow from your properties.
If you’re type #1—Hands-off—no need to keep reading.
But if you’re type #2—or just want to be type #2—this is the blog post for you! There are 7 ways to get more cashflow out of your rental business.
All of them depend on you doing a good job of real estate bookkeeping. Keep that in mind as you read.
Here we go.
#1 Collect missing rent and late charges (real estate bookkeeping tips)
Prior to using bookkeeping software, I was doing our books using Excel spreadsheets. One of the major limitations with Excel for real estate bookkeeping is that it doesn’t allow you to enter a missing rent payment.
We had a situation where a tenant didn’t pay their rent. We didn’t catch it for a month as a result.
With bookkeeping software, you’ll be able to create an invoice for a rent payment. This alerts you when it’s not been paid. If you’re self-managing your properties, you can set email reminders to your tenants and set late charges to be automatically applied.
#2 Increase your income
You might think that this just means “raise the rent.”
Sure, you could do that— and price your property out of the market.
Instead, you want to think about all the different types of income your properties bring in:
- Pet rent
- Laundry income
- Storage income
You might be tempted to just raise these fees unilaterally across the board.
And, you could do that.
But you’d be missing out on valuable data that come from tracking this income in granular detail.
You need to have an accurate picture of how much income you’re getting from each of these so you can measure your success.
#3 Decrease expenses through great real estate bookkeeping
The only way to decrease your expenses is to 1) know your expense categories AND 2) know the dollar amount you’re spending.
For example, take utilities. The amount you’re spending on utilities likely varies throughout the year based on the season. This is why tracking your expenses is particularly important.
There are many ways to reduce or eliminate this expense category.
- You could bill them back to your tenants.
- You could shift the cost to your tenants; for example, changing from natural gas heat to electric heat would shift the cost to the tenant, because most tenants have to pay for their own electric bills.
- You could make your property more energy-efficient; for example, if your property is in a colder climate, you might need to do a better job of sealing and insulating it. Or if your property is in say Arizona, solar panels may make sense (whereas in Seattle they might not!).
- Bonus: If you update your electrical system, you can potentially get a lower insurance rate because you’re reducing the risk of fire.
See how nuanced this is? This is where good bookkeeping is essential. Without this granular data, there’s no way I could really know where I’m spending “too much” or understand the best way to bring that expense under control.
#4 Get every possible tax deduction
There’s nothing more frustrating to me than finding out I missed out on a legitimate deduction.
Once I started doing the books for our rental business, I stopped missing deductions.
For example, Leti and I were able to recategorize a large (read: expensive) paint job as a repair instead of a capital expense.
This had a huge impact on our taxes— but it only worked because we had all of the proper documentation through our real estate bookkeeping to have a conversation with our accountant.
So instead of having to spread out the expense over several years, we were able to expense it immediately for a better tax break and more money in our pocket.
But again, the only way we were able to make the case for this was by having good books.
#5 Identify errors made by your vendors
We’ve had instances where two different vendors sent us an invoice for the same repair, but we didn’t catch it right away because we weren’t on top of our books. One time we had a property manager double-charge us for leasing a unit.
It’s much easier to correct these mistakes ASAP rather than many months later when you’re pulling things together to file your taxes.
#6 Spot costly issues early
Good bookkeeping lets you monitor trends. This way, when there’s a huge deviation from the trend you know about it right away. You can then get to the bottom of it.
For example, one time I received a huge water bill—way bigger than normal. I started investigating immediately and discovered we had an underground water leak.
Not only was I able to get the water company to remove the charge, but I was also able to prevent damage to the property that could have happened if the leak went on too long.
#7 Project your tax liability (stay current with real estate bookkeeping)
Staying current with your bookkeeping allows you to plan for your taxes.
Let’s say I can project that I’ll make $100K from my rentals. That $100K is taxable. But if I can project that at the 6-month mark, there’s still time for me to plan to spend $100K in smart repairs and upgrades to my units. The upgrades will improve my properties, allowing me to raise rents in the future (which will force appreciation).
In other words, if you know how much your tax liability will be, you can proactively plan your repairs to be about the same amount. Taking your cashflow and reinvesting it back into your rental portfolio will compound your money.
Pretty awesome, right? These are 7 ways you can get more cashflow without even buying another property.
The catch, of course, is that you have to be doing good bookkeeping. Otherwise, you simply can’t reap these benefits.
Interested in learning more about how to build a portfolio of cashflowing real estate? Be part of the conversation! Follow our general Semi-Retired MD Facebook page and then join our physicians or professionals group! After that, don’t forget to sign up for our Waitlist for the next Zero to Freedom course!