222 Week 5 F /For WIZARD KIM

Chapter 11

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G E T T H E S C O O P O N … Setting up and organizing your files ■ Keeping the books manually ■ Record-keeping for multi- ple properties ■ Using a computer to maintain

your records ■ Looking at the available account- ing software ■ Collecting rent without receiving

a check ■ Bill paying made simple ■ Documenting, documenting, documenting ■

Helpful reports to run ■ Interviewing and hiring an accountant ■ Meeting with your accountant

Keeping the Books — with or without

Technology

A ccurate record-keeping is a very important part of your success in managing your invest- ment property. There are many different ways

one can do this, from the most old-fashioned to state of the art. While a simple system suits many people, taking advantage of technology can be extremely efficient and can save you a great deal of time.

In the bookkeeping process and for tax reasons, keep accurate records of your income and expenses. You have rent coming in, accountability for the secu- rity deposits, and perhaps garage income if you have the ability to rent garages separately. On the other hand, you have many expenses you must account for: mortgage payment, insurance, property taxes,

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and common utilities. You also have repairs and unexpected expenses to account for.

Most rental property owners begin small and own a single- family home, a townhome, or a condominium. At this level, the accounting and record-keeping is very simple and often done manually. As you expand and purchase more properties and manage more units, you will need to look into better systems. Without a doubt, as you grow, using a computer saves you time and money.

The Internal Revenue Service (IRS) requires that you keep all documentation for your income and expenses. Keep detailed records, so that if you are ever audited or challenged on your income and expenses, you will have documented proof. The last thing you want is to be audited and have no written record of your income and expenses as backup. Remember, the burden of proof for your tax records lies with you.

There really is a great deal of paperwork in owning rental property. Many property owners don’t mind the people part of the business and marketing and showing the rentals, but few enjoy the accounting part. However, the financial side is a cru- cial element of owning rental property.

You can’t be expected to be good at everything. Some peo- ple are best at showing the properties and being in contact with people, while a few are best at the record-keeping. If you have a partner or someone else to help, you may find you each can offer different skills.

Understand how much bookkeeping is required Make an appointment with your accountant either before you purchase the property or soon after the transaction is complete, so that you are certain what is expected of you from a tax per- spective and an accounting point of view. I meet with my accountant at least once during the year, plus right after I have found a property to purchase and have closed escrow. There

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never seems to be enough time to meet before you purchase the property or during escrow, but I do make it a point to meet with my accountant after closing so that I can know what is expected. I can then plan for what the IRS will want or need while review- ing how my finances look on paper.

Maintaining your files the old-fashioned way There are many different ways to maintain your files for your rental properties. At first, you can use a simple system, but as you build your portfolio, you may want to change your system to a higher-tech one (see the following section). For now, I recom- mend that you visit your local office supply store and purchase a few simple things, such as the following:

■ A file box that will hold a few files, your records and bills, along with all your paperwork pertaining to that property. You will have your original paperwork from the purchase along with any items you received at the close of escrow. If you own a small property with one to five units, purchase a portable box that you can bring with you so that at any given time you have the records you need while at the property. You may even consider purchasing a box that has the ability to lock. If you want to keep it really simple, you can begin with the accordion-type file with dividers. As you purchase additional property, however, move up to a file box and/or a filing cabinet. I recommend a fireproof box for tax documents, lease agreements, and move-in inspections.

Bright Idea

Maintain separate files for each rental property you own. Keep track of the income and expenses separately, and keep the records very clear. If you hire a property management company, ask for everything to be separated per property.

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■ A box of letter-sized one-third-cut file folders. Get multiple colors; one for leases, one for expenses, one for the pur- chase documents, and so on. Use the same color organiza- tion for each property. This will help you find documents later.

■ A set of labels to clearly label each file.

In the beginning, less is definitely more and keeping it sim- ple is the right idea. Set up just a few files at first, and as you get going, add files. Begin with the following files and other office supplies:

■ Ownership papers file, which is for all the paperwork asso- ciated with owning your property.

■ Mortgage and taxes, a separate file for items like the mort- gage, taxes, and homeowner’s association (if you have one). Note that homeowner’s associations come into the picture if you own a condominium, townhome, or planned unit development (PUD). In this case, you may need to refer to the CC&Rs (conditions, covenants, and restric- tions) to be sure who needs to pay for a problem in the unit, so keep a copy here.

■ Property reports file, such as your contractor’s inspection report, termite report, soil report, city and/or county report.

■ Insurance file, where you keep your insurance papers, along with paid invoices.

■ Bank statements file, so that when your bank statements arrive, you can easily reconcile your checking account, and then file it away.

■ Duplicate deposit slips and a stamp, so that you can keep track of the details for each deposit. When you open your bank account, order a “For deposit only” stamp to make depositing your rent checks easier. Even if you only have one or two units, why not make each month’s deposit easier?

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■ Credit card receipts file, in which you place any receipts you charged on a card or on a line of credit. Then, when the statement arrives, you can easily attach the receipts to the paid invoice and double-check for any errors that may occur.

■ To-be-paid file, so you know all of the outstanding bills are located.

■ Paid-bills file, with paid bills; be sure to write or stamp “paid” on each and include the date (and perhaps even the check number).

■ Large repairs/capital expenses, including a new roof, new driveway, new decks. These are expenses that probably have to be depreciated (ask your accountant for additional information).

■ A file for each apartment, in which you file the lease, application, screening information, move-in documents, telephone numbers, rent-increase letters, notices served and the proof of service, and any correspondence to and from you and your tenants.

■ General file, if you own a larger building (more than five units); keep a file with letters, house rules, and anything you do or send to all tenants.

■ Key tags, but not with the address attached to the key. Instead, the key tag could be color coded, or you can create your own code. The important thing is that you

Watch Out!

If you own more than one rental property, be sure to keep your property files separated, particularly any income and expenses. When it comes time to sell the building, you’ll be grateful that you’ve kept separate tax records for each property. Also be sure to keep your personal income and expenses separated as well.

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will have a key to enter the property in the event of an emergency.

■ Travel expense record book, in order to track your mileage and other travel expenses associated with the purchase and management of your rental property.

Remember to keep your personal income and expenses com- pletely separate. When you open a separate checking account, order a different style or color from your personal checks. I rec- ommend that you order the larger-style checks and include the name of the business, the name of the building, or at minimum the property address. If you are using a computer to print your checks, these larger checks are very convenient. If you are doing things manually, order checks in duplicate so that when you are away from your home office and write a check, you will remem- ber to update your records. Always keep those documents and your receipts with your check records.

If you plan to charge expenses for your property, obtain a sep- arate credit card that you dedicate to the building. If you prefer not to add an additional credit card, keep a separate envelope with your credit card purchases. Write the property address and what you purchased on your copy of the charge if it is not already evident. Keep these receipts in the envelope that is clearly marked for that property. Each month, when your credit card invoices arrive, match the receipts with that statement.

If you own several properties, it is important to keep records separate, so that you know where each building stands with neg- ative or positive cash flow. Also when it comes time to sell, you want to have your records in detailed order for a smooth and easier transaction.

You can check with your accountant to see whether he or she has forms that you can use or can recommend for a manual sys- tem. Also try your local office supply store and check out all the different forms it offers.

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Computerized accounting systems In this day and age, many people own computers. Computers make your life so much easier in property management, and the good news is you can still keep even a computerized system fairly simple. As you acquire more properties, you will find that a computerized accounting system is the way to go.

If you only own one property and want to keep your book- keeping simple, check with your bank to see whether it offers an easy, online accounting system or shop online for a simplified computerized system that is similar to the manual system; you enter data just like you write a check manually. Contact Peachtree Business Products located in Atlanta, Georgia, either by phone at (877) 495-9904 or at www.peachtree.com. Peachtree has a sim- ple accounting system that is based on the pegboard system that accountants recommend to clients. When used alone, it offers a simple cash-basis system for smaller clients whose needs are sim- ple and whose knowledge of accounting and of computers is not extensive. You can also contact SAFEGUARD Business Systems at 1-800-909-3611 or www.gosafeguard.com. There are many soft- ware packages on the market. You may decide to use Quick Books or Quicken, but I strongly recommend that you first research soft- ware that is specifically for property management, particularly if you own several properties or more than one unit.

More complex rental management software accounting pack- ages include a general ledger, accounts receivable, accounts payable, check writing, budgeting, and the ability to run financial reports at any time and for any time period. In addition, you will

Moneysaver

Set up everything as easily as possible, whether you are keeping records man- ually or using a computer. Spending cash? Be sure to keep track of it. You may file the receipts in an envelope and once a month reimburse yourself. You can lose track of cash easily and forget this.

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find there are many details in the software that will help you maintain your records for both your tenants and your properties. There is usually a way to track a lease expiration, maintenance requests, reminder notes, utility billing, and all contact informa- tion for your tenants and your contractors. The more you want the software to do, the more it is going to cost, but consider the value of your time. Spending more up front may save you hours of manual recording throughout the year.

The reports you can generate can help you track your monthly maintenance costs, your monthly mort- gage expenses, your insur- ance costs, utility costs, and so on. At the end of the year, it is easy to run a year- end financial statement that reflects all income and expenses for each property,

which is very helpful for your year-end appointment with your accountant.

If you want to determine your vacancy factor, return on investment, or maintenance requests, you will be spending more for your system. This level of detail is not necessary at first, but it will become more important as the number of your invest- ment properties grow. For managing these complex functions, consider contacting the following companies:

Logicbuilt, Inc. Phone: 800-GO-LOGIC E-mail: [email protected] Web site: www.LogicBuilt.com

London Computer Systems, Inc. Phone: 800-669-0871, 513-583-1482 E-mail: [email protected] Web site: www.rentmanager.com

“ When evaluating andshopping for different software packages, compare a few and ask for references from some of the users. Test the trial version as well. ”—Julie D., bookkeeper

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PROMAS Landlord Software Center Phone: 888-591-5179 E-mail: [email protected] Web site: www.promas.com Note: This is the software I am using and I am very happy!

Property Automation Software Corporation Phone: 800-964-2792 E-mail: [email protected] Web site: www.propertyautomation.com

Winning Edge Software, Inc. Phone: 888-344-3343, 509-852-8000 E-mail: [email protected] Web site: www.PMEdge.com

Yardi Systems Phone: 805-699-2040 E-mail: [email protected] Web site: www.yardi.com

You now have six companies to research and determine which may work for your needs. The amount of properties you own and your technology skills will be the deciding factor. Don’t forget to call some of the users who may own rental property similar to the type you are thinking of purchasing.

Use demonstration disks or a trial version to see how you like the way you can navigate through the system. Check out the accounting package, the reports you can run, and how easy and simple it is to use. Again, work with your accountant, as you want the reports to be easy for him to use.

Bright Idea

If you’re using a professional management company, review your reports on a monthly basis. This gives you a good understanding and some control of your investment. Ask questions! Make sure you understand what you are looking at. Don’t wait until the end of the year to review your reports.

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Your computerized system can also help you control your expenses and know the maintenance history at any given time, as long as you are inputting the information.

Utilizing automatic funds transfers Technology can be very effective and assist you in managing rental property efficiently. More and more, you may see rent collection without ever seeing a rent check. The same goes for the bills you pay, which you can also do without ever writing a check.

Collecting rent without receiving cash or a check The latest way of collecting rent without ever receiving a check is electronic funds transfer (EFT), also referred to ACH (auto- mated clearing house). This allows the funds to be transferred from your tenants’ checking or savings account to your invest- ment account. Your tenant can schedule the rent transfer on a specific day and before the due date. Keep in mind this process may take one to two business days to complete.

You must be certain that the details of the electronic trans- fer are in the rental agreement or addendum. You must have a form prepared that has been approved or provided by your bank (see Appendix 4 for a sample) and you must have a voided check from your tenants’ account.

You will find that some tenants would like to use online payments. There are a few companies that will accept payment directly over the Internet and transfer that money to your account. Search the Internet for “pay rent online.” The payment could be by eCheck, credit card, or ACH. Of course there is a cost, but the benefit is that it takes you completely out of the loop.

Paying your bills automatically Not only can you collect rent without a rent check, you can pay almost all of your bills the same way. The best part is that when

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you set up your bills to be automatically deducted from your rental property account, in many cases, you can choose what date you want the amount to be debited from your account. This enables you to receive your rents first. For example: If your rent checks arrive on the 1st and are late by the 5th and your mort- gage is due on the 1st and late on the 16th, you can have your mortgage paid automatically on the 15th and you will never be late. Paying your bills online or as an automatic debit saves you not only time in having to write all those checks, but it saves you the cost of postage as well. It allows you to go on a trip without being concerned that you are going to miss those payments.

Hiring an accountant A very important part of owning property is the accounting part of the equation. Accounting is the procedure that lets you know how things are running, and you need to know whether your investment is running in positive or negative numbers. A good accountant will be able to tell you not only that but also what you need to do to increase your profits. If there are losses, your accountant will make sure to point them out. The information he or she provides you allows you to refocus your direction, if need be. This is why I recommend two appointments: one during the year, and one early on in the year when you begin owner- ship. Later on, you and your accountant will adjust the appoint- ments according to need.

You need to be sure to hire someone who can handle the accounting for you professionally. Your accountant will perform an audit of your records to make sure you are allocating things correctly.

Watch Out!

If you are going to use the automatic systems, be sure to record the charge each month to obtain an accurate balance. It is very important that you double-check the amount of the automatic payment.

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Remember: Accountants aren’t the same as bookkeepers, although most people think they are one in the same. A book- keeper and accountant handle totally different things. You or your property management company usually handles the book- keeping (rent collection, bill-paying, and basic paperwork), whereas an accountant merely keeps track of what you have done, making sure you are on the right track for allocating expenses, fil- ing proper tax forms with state and federal governments on time, depreciating assets appropriately, and paying applicable taxes and disbursements to your real estate holdings or your investors.

You need to know what to look for when hiring an accountant.

■ Find an accountant who specializes in real estate account- ing and in handling real estate transactions. Ask for a refer- ence from someone you know who owns property.

■ Make sure the person is familiar with real estate law to some degree, as he or she needs to have a well-rounded picture.

■ Be sure your accountant has the same philosophy you do on taxes and investments. People tend to be either more conservative or more aggressive with tax write-offs and determining their expected return on investment (ROI).

■ Make sure you know the fee schedule. Does the accoun- tant charge hourly, or is the cost based on the appoint- ment and the tax returns? Be clear what you are paying for before deciding to hire someone.

■ You can ask the accountant for a few client references. Any professional will be willing to provide you with a list of references. You need to take the time to call to make sure this is the person you are going to hire.

■ Trust your instincts as well. You know how you feel about meeting someone new and after talking to him or her — you either feel confident or not.

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A good accountant should look out for your best interest. You want someone who is savvy and understands investing and the laws that accompany owning rental property.

Reports to run When you are using a computer, you probably have the option to run different reports for your accountant to review. You and your accountant will decide which reports and how many, depending on your portfolio. Obviously, managing one unit as opposed to several will make a difference as to how often you run the reports and meet with your accountant.

For example, let’s say you own a six-unit building or larger. You would run your rent report on the rental due date, review- ing who has paid and who is still outstanding. The day that you make a deposit or pay bills, it is a good idea to know your account balance, so you would run a report showing your end- ing account balance at the end of the day. (If you have several properties, you would run the report per property.) It is always a good idea to know where your account stands at all times.

It is best to run monthly detailed reports, as well as year-end financial statement for your accountant and for your perma- nent records.

■ Run a ledger balance whenever you have any financial activity.

■ Run a detailed report of all your checking account transactions.

Moneysaver

Being prepared can save you money. By taking the time at least once or twice during the year to be prepared and to know where you stand financially, you save money by paying less in taxes or knowing what you need to do to pay less in taxes before the year is over.

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■ At the end of the month and after you reconcile your checking account with your bank statement, run a month- end report.

■ If you own multiple properties and you maintain one checking account, run a profit and loss statement for each property. This is accurate at any given time if you run all your checks and deposits through a computerized accounting system.

■ If you are going in to see your accountant, I recommend doing a cash flow report from the start of that year (or from the acquisition of the property) until the date you are meeting. As an alternative, you could end it at the end of the previous month or quarter end. Run a profit and loss statement for the end date to get the exact income and expenses. Run a balance sheet for that date to get the current cash balance. My accountant likes to see my detailed check register as well. But ask your accountant; he or she may provide a checklist for you.

■ You can run a tenant detail statement at any time so that you have details on your tenants such as last rent increase and when the lease expires. This may help for future pro- jections.

You may set up an arrangement with your tax accountant to send either monthly or even quarterly statements for review. I would set this up in advance and determine the cost prior to just doing it. This may be required if you have financing through individual investors, as they want to see that you are handling the investment well.

Meeting with your accountant When it is time to meet your accountant, be prepared and arrive with your records organized. (If you are paying the accountant an hourly rate, you will save money as well as time.) Some accoun- tants will give you a list of what you should plan to bring in

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advance. A good accountant is someone you hear from on a reg- ular basis, not just at the end of the year. If you have an orga- nized filing system along with a property management software program, you will avoid having to scramble around in search of your receipts and paperwork a few days before your appoint- ment. Keep your records accurate and organized all year round. Put receipts and records in their place and in the long run, you will be much happier and your systems will run much smoother.

Just the facts ■ Organization will save you time and money.

■ Keep your personal income and expenses separate.

■ Records from different properties should be kept separate.

■ If you are going to keep records manually, there are sys- tems available that will help you keep track of your income and expenses.

■ As you grow and add more rental property to your portfo- lio, adding a computer is a wise choice.

■ Shop around for the software package that will work for your needs and call on client references.

■ You can collect rent without ever receiving a check.

Backing Up Your System A very important part of using a computer is the daily work- ing backup. Make sure you take the time each day to back up all data, because you are entering and storing much of your pertinent property information in your computer — and we all know that anything can happen. You need to make sure you have a good backup system and it works! Keep the backup in a safe place — preferably at a different location than your computer.

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■ Paying your bills automatically can be easy and will save you a great deal of time and postage expense.

■ Hiring a great accountant is an important part of owning rental property.

■ Meet with your accountant early, not only at the end of each year.

■ Be prepared when it is time to meet with your accountant.

■ Remember to back up your data.

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Prandi, M. (2005). The unofficial guide to managing rental property. Retrieved from http://ebookcentral.proquest.com Created from apus on 2020-06-29 21:33:03.

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