How to Use Spreadsheets to Track Your Property Accounting (+ Disadvantages vs. Software)
While there are numerous rental property accounting software options available, many property managers and landlords still prefer using spreadsheets, such as Microsoft Excel or Google Sheets, for their accounting needs.
So, in this article, we will be walking through how to use excel spreadsheets for accounting, as well as why property management software may be the better, simpler choice for landlords and property managers of all kinds.
To begin, let's discuss how spreadsheets can be set up for property accounting.
Setting up Spreadsheets for Property Accounting
When it comes to rental property accounting, selecting the right spreadsheet program is crucial for managing your rental income, expenses, and overall financial performance.
There are several popular options to choose from, with the most popular being:
1. Microsoft Excel
- Widely used by real estate investors and small business owners alike
- Offers a range of accounting features and functions
- Allows for customization and integration with other Microsoft products
2. Google Sheets
- Web-based software accessible from any device with internet access
- Allows for real-time collaboration and multiple users
- Offers a range of pre-built templates for rental property accounting
Creating a template
Once you've chosen your preferred spreadsheet program, it's time to create a template to help you track your rental property accounting basics.
Begin by creating a header row that clearly defines each column's purpose. Include headings such as:
- Property (if managing multiple rental properties)
Format your cells to ensure accurate data entry and improve the overall appearance of your spreadsheet.
For example, use currency formatting for income and expenses, and date formatting for the date column.
Using conditional formatting
Apply conditional formatting to highlight specific cells or rows based on certain criteria.
For instance, you can use conditional formatting to flag overdue rent payments or identify high operating expenses.
Freeze the header row and any important columns to keep them visible as you scroll through your data.
This makes it easier to track income and expenses without losing sight of important information.
Implement data validation to restrict the types of data that can be entered into specific cells. This can help prevent errors and ensure accurate bookkeeping.
So, after getting your initial spreadsheet setup, we can move onto some of the key components of property accounting that should be present in the spreadsheet.
Key Components of a Property Accounting Spreadsheet
In this section, we will be discussing some of the most important components of property accounting that should be included in any property accounting spreadsheet.
To begin, let's talk about the property information.
One of the most important things to include in your property accounting spreadsheet is basic property information.
To begin using spreadsheets for property accounting, start by listing the property address. This information is vital for rental property accounting basics and helps real estate investors identify and organize their rental properties easily.
Recording the purchase price of your rental property is essential to track your investment and calculate the return on investment (ROI). This information is also necessary for tax purposes and creating accurate financial statements.
List the mortgage details, including the loan amount, interest rate, and loan term. Mortgage interest is tax-deductible, making it essential to track for tax season and maximizing tax benefits.
Next, let's talk about income tracking in the spreadsheet.
A significant component of rental property income is rent collection.
Record the rent payments received from tenants in your spreadsheet to monitor rental income, identify late payments, and manage rental property banking efficiently.
To maintain a solid bookkeeping system, it's important to track late fees charged to tenants.
This helps you ensure timely rent payments and contributes to your overall rental property income.
Other Income Sources
Don't forget to include other income sources, such as pet fees or security deposits, in your property accounting.
These additional sources contribute to your overall cash flow and must be accounted for in your financial statements.
Another essential aspect to track in your accounting spreadsheet is your property's expenses.
Track your monthly mortgage payments, including principal and interest, to monitor your loan's progress and maintain accurate financial accounts.
Property taxes are a significant expense for real estate investors. Record these expenses in your spreadsheet to help prepare for tax time and create accurate profit and loss statements.
Insurance costs are essential to track in your property accounting spreadsheet.
This includes property and liability insurance, which protect your real estate assets and contribute to operating expenses.
Maintenance and Repairs
Keep track of all maintenance and repair expenses, as these costs directly impact your rental property's cash flow and net income.
Regularly updating these expenses helps you project future expenses and make informed decisions about property management.
Some rental property owners may be responsible for paying utilities, such as water, electricity, or gas.
Make sure to include these costs in your spreadsheet to accurately monitor your rental property expenses.
Property managers or management companies often charge fees for their services.
Recording these fees in your spreadsheet helps you evaluate the financial performance of your rental property and compare the costs of different property managers.
Cash Flow Analysis
Finally, another important thing to include in your spreadsheet is a thorough cash flow analysis, which we will discuss below.
Monthly Cash Flow
Calculating your monthly cash flow is crucial to evaluate your rental property's financial health.
By comparing your income and expenses, you can determine your actual cash flow and make necessary adjustments to improve profitability.
Year-to-Date Cash Flow
Keep an eye on your year-to-date cash flow to assess your rental property's performance over time.
This information is vital for real estate investors to make informed decisions and adjust their strategies as needed.
Annual Cash Flow Projection
Creating annual cash flow projections allows you to forecast your rental property's financial performance and make data-driven decisions.
This can help you identify potential issues and opportunities, such as refinancing your mortgage or increasing rent prices.
Depreciation and Tax Implications
Understanding depreciation schedules and their tax implications is critical for rental property owners.
Depreciation can provide significant tax benefits, as it allows you to deduct a portion of the property's value each year.
Include a section in your spreadsheet to track depreciation and its impact on your tax forms.
Now that we know about all of the essential things that should be included in your property accounting spreadsheet, let's talk about some of the more advanced things to consider including.
Advanced Spreadsheet Functions for Property Accounting
Apart from the basic, essential components of a property accounting spreadsheet, there are also some more advanced functions that should be considered.
Below, we will outline some of these functions and how they can be used.
Using Formulas for Calculations
First, let's go over some basic calculations that are present in most spreadsheet software.
The SUM function in Microsoft Excel is a powerful tool that simplifies rental property accounting by automating calculations.
By using this function, real estate investors can easily add up their rental income, rent payments, and other income sources to calculate their total rental property income.
The AVERAGE function is another useful feature of Excel spreadsheets for accounting purposes.
This function calculates the average value of a range of cells, which is particularly helpful for rental property accounting tasks such as determining the average rent for all rental properties, or the average operating expenses for each property.
The COUNT function in Excel is beneficial for rental property accounting as it helps to count the number of cells in a range that meet specific criteria.
For example, a property manager can use the COUNT function to track the number of rental properties, the number of units occupied, or the number of rent payments received each month.
Pivot Tables for Data Analysis
Pivot tables are an excellent feature in Microsoft Excel that allows real estate investors to organize and summarize large amounts of financial data.
With pivot tables, rental property accounting becomes more manageable as property managers can easily analyze data, such as rent payments, accounts payable, and rental property banking, to make informed decisions about their business finances.
Pivot tables also make it easier to identify trends in rental property income and expenses.
By using these tables, property managers can quickly spot patterns in their financial accounts, such as fluctuations in rental income or increases in operating expenses, helping them make informed decisions about their rental properties' financial performance.
There are also many financial functions present in spreadsheets, including:
• Mortgage Interest: Excel offers a range of financial functions that can help property managers calculate mortgage interest, tax benefits, and other important aspects of rental property accounting. These functions are particularly helpful during tax season when real estate investors need to prepare profit and loss statements and other financial reports.
• Depreciation Schedules: Financial functions in Excel can also assist in creating depreciation schedules for rental properties, which are crucial for accurately calculating tax deductions and understanding the overall value of real estate assets.
• Cash Flow Analysis: Excel's financial functions enable property managers to assess the actual cash flow of their rental properties by considering income and expenses, future expenses, and tax implications. This analysis helps property managers to make informed decisions about their properties and track their financial performance.
At this point, you should know everything about tracking your property accounting with spreadsheets.
However, it is important to consider other options, like property management software, which we will discuss in the next section.
Disadvantages of Spreadsheets vs. Property Accounting Software
In this section, we will discuss some of the disadvantages that spreadsheets have compared to more dedicated property accounting software.
One of the first issues with spreadsheets is their limited scalability, which we will further outline below.
Managing Multiple Properties
Using excel spreadsheets for accounting may seem like an efficient way to manage rental property accounting for a small number of properties.
However, as your real estate investing portfolio grows, the scalability of spreadsheets becomes limited.
Managing rental properties, rental income, and expenses across multiple properties can quickly become overwhelming, making it difficult to maintain a solid bookkeeping system.
Growing Portfolio Complexity
As your portfolio of rental properties expands, the complexity of rental property accounting increases.
Tracking income and expenses, such as rent payments, mortgage interest, and operating expenses, becomes more challenging.
Spreadsheets struggle to keep up with the demands of growing rental property banking and bookkeeping needs.
Lack of Automation
Another prominent issue with using spreadsheets is the lack of automations, which we'll outline below.
Manual Data Entry
One of the primary disadvantages of using spreadsheets for rental property accounting is the need for manual data entry.
As a business owner, you'll spend a significant amount of time inputting data, such as rent payments and expense tracking, which can be time-consuming and prone to errors.
In contrast, rental property accounting software automates many accounting tasks, reducing the risk of mistakes and saving time.
Spreadsheets require manual updates and constant maintenance to keep your financial data up-to-date.
The time spent on managing spreadsheets can be better spent on other aspects of your real estate business.
With accounting software, processes like payment tracking, bank account reconciliation, and generating financial statements are automated, streamlining your rental property accounting process.
Apart from functional issues, spreadsheets may also have security concerns, which are outlined below.
Excel spreadsheets lack the robust security features found in web-based software like QuickBooks Online or dedicated rental property accounting apps.
This makes your sensitive financial data, such as bank accounts and rent payments, vulnerable to data breaches, potentially compromising the security of your business finances.
Spreadsheets don't offer the same level of access control as accounting software, making it challenging to manage multiple users and their permissions.
This can lead to unauthorized access to sensitive financial data or accidental changes to your rental property bookkeeping.
No Dedicated Support
Finally, another main issue with spreadsheets is that there is no dedicated support when users have issues with the spreadsheet software.
While most people are familiar with Microsoft Excel, mastering the intricacies of rental property accounting using spreadsheets can be a steep learning curve.
Accounting software often comes with comprehensive tutorials, customer support, and even dedicated account managers, making it easier to navigate the accounting process.
When issues arise with your spreadsheet-based bookkeeping system, troubleshooting can be difficult and time-consuming.
In contrast, rental property accounting software providers often offer dedicated support, assisting with any problems you may encounter.
In conclusion, spreadsheets can be a helpful and cost-effective tool for managing your property accounting needs.
While they may lack some of the advanced features and automation that dedicated property management software offers, they can still prove to be quite valuable for landlords and property managers who want to take control of their finances.
However, if you're looking for a versatile, customizable solution that puts you in the driver's seat of your property accounting, then property management software, like DoorLoop, may be the best option.
Schedule a demo today to find out more about how DoorLoop can both simplify and supercharge your property accounting vs. complex and hard-to-use spreadsheets.