Maintaining the Ledger

Maintaining rental properties takes not only physical labor, but it also takes a fair amount of bookkeeping. There are two “books” the rental property investor maintains. A financials spreadsheet that provides an overview of the income and outgo for each unit and a ledger that tracks in detail the daily expenses for the business.

Of course, there are plenty of apps and software available to help the investor organize this data, but I’ve always preferred the good ole’ excel spreadsheet! In the chapter, “Bookkeeping and Taxes” of my new book, Collect Rent, Don’t Pay It! A Beginner’s Guide to Rental Property Investing I share the tools we use to track an investment. The following is an excerpt regarding the all-important ledger!

In order to take advantage of the many tax benefits of rental property investing, the owner must maintain detailed records of every expense. This will make tax time a snap and also keep the owner out of trouble in the event of an audit.

Just like for property management, there are a lot of great software and apps on the market that can help an owner keep track of expenses. Some credit card apps even have great receipt management features that I’ve used in the past. But what I’ve found most effective to maintain expenses is, you guessed it, an Excel spreadsheet!

Before we dive into the ledger, let’s talk about maintaining receipts. Again, many folks keep everything digital to include scanning paper receipts, but I’ve just found scanning paper copies takes more time than I want to spend.

I maintain an “accordion” file folder tabbed by unit. When I have an expense, I bring the receipt home (this is sometime harder than it sounds), log the expense on the Excel spreadsheet ledger and place the receipt into the file for the unit.

Important to note for tax purposes, expenses are tracked by building, not unit, but I still like to keep it broke down by unit for good bookkeeping purposes. When it is time to do taxes, I remove the receipts from the accordion file folder and reconcile one last time with the ledger spreadsheet. Bam, you’re done!

There will sometimes be digital only receipts such as for property taxes, insurance premiums and online material purchases. I simply record the expense on our ledger and save the digital receipt in a well-marked file folder on our PC. Coming up in the portion on taxes I’ll talk briefly about mileage expenses as they are tracked slightly differently for tax purposes.

Maintaining the receipt is the key part. If an owner doesn’t have proof of an expense, they simply can’t deduct it on their taxes. But organization is key. Keeping receipts jumbled up in a shoe box may be almost as ineffective as not maintaining the receipt at all! Maintaining these records for posterity is important. We have a cloud backup service that backs up all of our business files. Yet another deductible expense!

Like most things, I keep it simple. Obviously, the location column in our ledger has the property address and the payee column contains the tenant’s last name, this also makes the data sortable. With a few simple clicks you can sort to determine how much has been spent by type of expense on a certain property or a tenants particular payment habits.

We back up this data every month. I don’t include HOA fees as well as mortgage principle and interest on our ledger as those payments are set up automatically from our business account but it would be easy enough to add both if desired.

This ledger also is only for our local properties that we actively manage. The rental property management company who handles our Texas properties has a very similar ledger easily downloadable in excel format. Where do you think I got the format?

As mentioned, come tax time, I pull the receipts out of the accordion file and reconcile with this ledger. There may be one or two corrections required to make the ledger and receipts reconcile. Upon completion, I store the receipts for posterity in a letter sized envelope writing the property name and expenses by type on the outside.

Digital items are backed up in a structured file system to both our home external drive and cloud storage. We do our own taxes, more on that in just a moment, but I think even if I hired an accountant, this system would be readily accepted and make their job easier.

While it takes some discipline to maintain receipts, log the item and properly store the receipt for every expense, these simple tasks must become second nature. If not, the consequences could be severe to include profit loss, a real headache around tax time and absolutely worse case, a bad IRS audit outcome.

If you found this sneak peek interesting, there is plenty more where that came from! Pick up Collect Rent, Don’t Pay It! NOW on Amazon!

Want to learn more about the financial truths that have helped our average American family achieve success? Check out my book, Millionaire on a Worker’s Budget: Five Financial Truths to Build Wealth on sale now at Amazon!

The commentary provided in this blog is for informational purposes only and is not intended to be a source of financial or investing advice.

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