How To Track Rental Property Operating Expenses?
- March 1, 2023
- Category: Property Management
As a rental property owner, you know that managing your property’s finances can be a complex and challenging task.
One of the most critical aspects of financial management is tracking your rental property operating expenses.
Doing so lets you gain valuable insights into your property’s financial performance and make more informed decisions about allocating resources.
In this blog post, we’ll explain why tracking rental property operating expenses is essential and provide practical tips on how to do it effectively.
Whether you’re a seasoned property owner or just starting, this guide will help you improve your financial management practices and maximize your property’s profitability.
So, let’s get started!
Types of Operating Expenses
When it comes to rental property operating expenses, there are many different costs that property owners need to track. These expenses can be broken down into several categories, each with unique considerations. Here are some of the most common types of operating expenses that rental property owners need to track:
Property taxes are among the most significant operating expenses for rental property owners. Local governments assess property taxes based on the property’s value. Property owners must pay these taxes annually, which can be a significant expense, especially for high-value properties.
Property insurance is another essential operating expense that rental property owners need to track. Insurance can help protect your property against damage from natural disasters, theft, and other unexpected events. The insurance cost can vary based on factors such as the property’s value, location, and level of coverage.
Repairs and Maintenance
Rental properties require ongoing repairs and maintenance to keep them in good condition. Examples of repairs and maintenance expenses include fixing leaks, replacing appliances, and maintaining the property’s landscaping. These expenses can add up quickly, but they are essential to ensure your property is safe and habitable for tenants.
Utilities, such as electricity, gas, and water, are another operating expense that rental property owners need to track. These expenses can be passed on to tenants, but property owners are usually responsible for paying them. Keeping track of utility expenses can help property owners identify ways to reduce costs and make their properties more energy-efficient.
Property Management Fees
Finally, if you use a property management company to manage your rental property, you’ll need to track the fees associated with their services. Property management fees include advertising, tenant screening, rent collection, and maintenance coordination. These fees can vary depending on the level of service provided and the size of the property.
Methods of Expense Tracking
Now that we’ve covered the types of operating expenses that rental property owners need to track let’s explore some of the most common methods of expense tracking. There are several ways to keep track of your rental property’s operating expenses, including:
A spreadsheet is one of the most straightforward methods of tracking rental property operating expenses. It can be as simple as creating a spreadsheet in Microsoft Excel or Google Sheets and manually entering each expense as it occurs. Spreadsheets can be a low-cost option for property owners just starting and wanting to track expenses independently.
For more advanced expense tracking, property owners may consider using accounting software. Accounting software can help automate expense tracking and provide a more comprehensive view of your rental property’s financial performance. Several accounting software options are available, including QuickBooks and Xero, which are popular among rental property owners.
Another option for tracking rental property operating expenses is by using mobile apps. Many property management and accounting apps offer expense-tracking features, allowing property owners to enter expenses on the go and keep track of their finances in real time. Examples of popular apps for rental property owners include Cozy, Zillow Rental Manager, and Landlord Studio.
When tracking rental property operating expenses, organizing your expenses into categories is essential. It will help you better understand where your money is going and make it easier to identify areas where you can save money or invest more resources.
Here are some common expense categories that rental property owners may consider using when tracking their operating expenses:
Repairs and Maintenance
This category includes expenses related to repairing and maintaining the rental property, such as fixing plumbing issues, repairing the roof, or repainting the walls.
Property Management Fees
If you hire a property management company to manage your rental property, you’ll need to track the fees associated with their services. It may include a percentage of the monthly rent, leasing fees, and other administrative costs.
Property taxes are one of the most significant expenses of owning rental property. Track these expenses separately to accurately calculate your net income and deduct them from your taxes.
This category includes expenses related to providing utilities to your rental property, such as water, gas, and electricity.
Advertising and Marketing
If you advertise your rental property to attract tenants, you’ll need to track the expenses associated with these efforts. It may include online advertising, newspaper ads, or signage.
Track your monthly payments separately if you have a mortgage on your rental property. It will help you understand how much your rental income goes toward your mortgage.
Tracking your rental property operating expenses is only half the battle. To get a complete picture of your property’s financial health, you must keep accurate records of all expenses.
Maintaining Receipts and Invoices
Keeping all receipts and invoices related to your rental property operating expenses is essential for accurate record-keeping. These documents will help you keep track of all your expenses and provide evidence in case of an audit.
Reconciling Records with Bank Statements
It’s essential to reconcile your expense records with your bank statements regularly. It will help you identify discrepancies or errors and ensure that your records accurately reflect your expenses.
Use Accounting Software
Using accounting software can make record-keeping much more manageable. These programs can help you organize your expenses by category and provide reports on your property’s financial performance.
Keep Records for Tax Purposes
Keeping accurate records is especially crucial when it comes to tax time. You’ll need to provide detailed expense reports to your accountant or tax preparer, so they can accurately calculate your tax liability.
One of the key benefits of tracking your rental property operating expenses is the ability to deduct these expenses from your rental income for tax purposes. It can reduce your taxable income and save money on your tax bill.
The IRS allows rental property owners to deduct a wide range of operating expenses from their rental income, including:
- Property taxes
- Mortgage interest
- Repairs and maintenance
- Insurance premiums
- Property management fees
Keep Accurate Records
To take advantage of these deductions, you must keep accurate records of all your rental property operating expenses. It includes maintaining receipts and invoices and keeping detailed expense reports.
Consult a Tax Professional
Tax laws and regulations can be complex and ever-changing. It’s essential to consult with a tax professional who can advise you on the best ways to take advantage of the tax benefits of rental property ownership and ensure compliance with all applicable laws and regulations.
Tools and Resources
There are several tools and resources available that can help rental property owners track their operating expenses more effectively. Here are some examples:
There are many online calculators available that can help you estimate your rental property operating expenses. These calculators consider factors such as property taxes, insurance, utilities, and maintenance costs and can provide you with a reasonable estimate of your total expenses.
Expense Tracking Software
Expense tracking software can help you keep track of your rental property operating expenses and maintain accurate records. These tools allow you to input all your expenses and categorize them by type, making tracking and analyzing your spending easy.
Accounting tools like QuickBooks and Xero can help rental property owners keep track of their income and expenses, generate financial reports, and simplify tax preparation. These tools can benefit owners with multiple properties or complex financial situations.
Finally, it’s always a good idea to consult a tax professional who can advise you on the best tools and resources for your situation. They can help you choose the right tools and ensure compliance with all tax laws and regulations.
Tracking rental property operating expenses is essential for effective financial management as a rental property owner. By tracking expenses accurately, you can better understand the financial performance of your property, identify areas where costs can be reduced, and optimize your tax deductions.
To track your expenses effectively, it is essential to understand the different types of operating expenses, use appropriate expense categories, and adopt a suitable method for tracking expenses. You should also maintain accurate records of your expenses, including receipts and invoices, and reconcile your records with bank statements.
Fortunately, many tools and resources available to rental property owners can help streamline the expense tracking process. Whether you use a simple spreadsheet or sophisticated accounting software, the key is finding a method that works for you and your property.
We hope this guide has provided you with valuable insights into how to track rental property operating expenses. By following the best practices outlined in this post, you can stay on top of your expenses and make informed decisions to improve the financial performance of your rental property.
Why is it essential to track rental property operating expenses?
Tracking rental property operating expenses is essential for effective financial management. By tracking expenses accurately, you can better understand the financial performance of your property, identify areas where costs can be reduced, and optimize your tax deductions.
What are some common types of rental property operating expenses?
Some common rental property operating expenses include property taxes, insurance, repairs and maintenance, utilities, and property management fees.
What are some methods for tracking rental property operating expenses?
Various methods for tracking rental property operating expenses include spreadsheets, accounting software, or mobile apps.
What are some best practices for tracking rental property operating expenses?
Some best practices for tracking rental property operating expenses include using appropriate expense categories, maintaining accurate records of expenses and reconciling them with bank statements, and regularly reviewing your expenses to identify cost-saving opportunities.
How can I optimize my tax deductions by tracking rental property operating expenses?
By tracking your rental property operating expenses, you can identify tax-deductible expenses, such as repairs and maintenance, property management fees, and property taxes. These deductions can reduce your taxable rental income and lower your tax bill.
Are any tools or resources available to help me track my rental property operating expenses?
Yes, many tools and resources available to rental property owners can help streamline the expense tracking process. These include online calculators, expense-tracking software, and accounting tools.