3 Accounting Reports Every Landlord Should Know About (and Check Often)
As a landlord or property manager, keeping track of your finances is an essential part of running a successful rental property business.
Effective rental property accounting allows you to accurately monitor your property's performance and make informed business decisions.
Accounting also plays a critical role in tax reporting and compliance as it ensures that you have accurate records of income and expenses for your rental properties, which is necessary for filing tax returns and claiming tax deductions.
Inaccurate or incomplete records can result in incorrect tax filings and, in some cases, penalties and fines, which can severely hurt your rental property income.
In this post, we'll provide you with a guide to accounting reports that you should know about and check often.
We will also discuss common mistakes made with accounting reports, such as failing to track expenses, ignoring seasonal trends, and not reviewing reports regularly.
By the end of this post, you should have a better understanding of the importance of accounting in your rental property business and be familiar with the various accounting reports you should be tracking.
So, let's get started.
3 Important Types of Accounting Reports
Now that you understand the importance of accounting reports, let's discuss three types of accounting reports that you need to be running to optimize your business.
1. Profit and Loss Statement (P&L)
A profit and loss statement (P&L), also known as an income statement, is a financial report that shows a rental property's revenue, expenses, and net income over a specific period.
The report provides an overview of the rental property's profitability, detailing its revenue and expenses in different categories, such as rental income (such as rent payments), maintenance expenses, property taxes, and mortgage interest.
Importance of P&L Statements
A P&L statement is an essential report for property owners and managers because it allows them to evaluate the rental property's financial performance over a period of time.
By analyzing the report, you can determine whether the rental property is profitable and identify areas where it can cut costs or increase revenue.
The P&L statement is also important for tax purposes, as it summarizes the rental property's income and expenses, which landlords need to file accurate tax returns.
What is included in a P&L statement?
Some categories that might be included in a rental property P&L statement are:
- Rental income
- Property taxes
- Mortgage interest
- Repairs and maintenance
- Property management fees
- Legal and professional fees
2. Balance Sheet
A balance sheet is a financial report that provides a snapshot of a rental property's financial position at a specific point in time.
The report includes the rental property's assets, liabilities, and equity, detailing its financial resources and obligations.
Assets may include the rental property itself, rental income owed by tenants, and bank account statements. Liabilities may include mortgage debt, unpaid bills, and taxes owed.
Importance of balance sheets
A balance sheet is one of the most important accounting reports for landlords because it'll help understand the rental property's financial health.
Analyzing the report can help you determine your rental property's net worth, which is the difference between your assets and liabilities.
A balance sheet can also help landlords identify potential financial risks, such as too much debt or unpaid bills.
What's in a balance sheet?
Assets that could be included in a rental property balance sheet include:
- Cash and bank accounts
- Rental income owed by tenants
- Security deposits
- Furniture and appliances
- Equity in the rental property
Aside from assets, liabilities can also be included in a balance sheet.
Here are some that might be included:
- Mortgage debt
- Unpaid bills
- Taxes owed
- Security deposits owed to tenants
3. Cash Flow Statements
A cash flow statement is a financial report that shows a rental property's cash inflows and outflows over a specific period.
The report provides an overview of the rental property's liquidity, detailing its cash reserves, cash generated from rental income, and cash spent on expenses such as repairs, maintenance, and mortgage payments.
Importance of cash flow statements
A cash flow statement is essential for landlords and property management companies because it helps understand the rental property's ability to generate cash and meet financial obligations.
Analyzing this report helps a property management company, in specific know whether its rental property has enough cash to cover its expenses and make necessary repairs and improvements.
A cash flow statement can also help landlords identify potential financial risks, such as insufficient cash reserves or high debt.
Some categories that we believe should be included in a rental property cash flow statement include:
- Rental income received
- Payments for repairs and maintenance
- Mortgage payments
- Property taxes
- Insurance premiums
- Property management fees
- Payments to owners or investors
- Security deposits refunded to tenants.
How to Run These Reports
Now that you understand the importance of accounting reports and the types of reports you should be running, you may be wondering how to run them.
Traditionally, property owners and managers would manually track their financial data using spreadsheets or paper records.
However, in recent years, there has been a significant shift towards using property management software to automate the process.
Property management software, such as DoorLoop can help you generate accounting reports quickly and easily.
Most software providers offer built-in reporting features that allow you to generate reports with just a few clicks, so ensure to choose the one that works best for you.
To generate a report, you will typically need to select the report type, specify the reporting period, and select any additional filters or criteria.
For example, to generate a P&L statement, you would select the P&L report type, specify the reporting period (such as the last month, quarter, or year), and select any additional filters (such as specific income or expense categories).
Once you have selected your options, the software will automatically generate the report for you, saving you time and effort.
It's important to note that while property management software can help you generate reports quickly and easily, it's still essential to review the reports regularly and ensure that the data is accurate and up-to-date.
Common mistakes with accounting reports include poor income and expense tracking, ignoring seasonal trends, and not reviewing reports regularly.
So, reviewing your reports regularly can help you catch any errors or discrepancies early on and take corrective action before they become more significant problems.
Running accounting reports such as the Profit and Loss Statement (P&L), Balance Sheet, and Cash Flow Statements can provide a range of benefits for landlords.
By regularly running accounting reports, landlords and property managers can gain a better understanding of the financial health of their rental property.
This allows them to make informed decisions about how to allocate resources and plan for future investments.
For example, if the P&L statement shows that maintenance costs are increasing, a landlord may decide to reduce expenses in other areas to maintain profitability.
Accounting reports can also help landlords create and stick to a budget.
The P&L statement shows income and expenses over a specific period, which can help landlords project expenses and plan for unexpected costs.
The Balance Sheet shows the financial position of the rental property, including assets, liabilities, and equity.
This information can help landlords identify opportunities to invest or reduce liabilities to improve their financial position.
Accounting reports help landlords ensure they are accurately tracking their finances and complying with tax and legal requirements.
Regularly reviewing financial reports can help you identify errors or discrepancies and make corrections before they become bigger problems. This can also help landlords stay compliant with tax laws and regulations.
If a landlord has investors or partners, accounting reports can help maintain trust and transparency, which can help maintain positive relationships and encourage future investments.
Now that you understand the importance of running these reports, you're ready to maximize your business and be a pro-landlord.