By: Darshan Sheth, CPA
Key Takeaways:
- Small landlords owning fewer than five rental units need to stay informed of local laws and regulations to avoid costly penalties.
- Security deposits must be collected and maintained according to legal requirements in the jurisdiction.
- Reconcile all income from rental payments, including payments made online or in cash.
- Choose the right property management software for the job and invest time doing research on platforms available.
- Maintain a separate business bank account for rental activities to simplify accounting and minimize fees.
- Recognize when it’s time to hire a property manager to handle what you can’t manage yourself.
Residential rental property owners are increasingly pressured by interest rates, late rental payments by tenants and the rising costs of making repairs, among other expenses. But for small landlords – those who own fewer than five rental units – cutting costs by foregoing property management or accounting help is a mistake.
Local and state laws governing rental properties are sometimes arcane, requiring knowledge and experience to ensure that your accounting practices, tenant management and building management are in compliance. Making a mistake in any one of these areas can result in costly penalties.
Following are the five most common mistakes we see among small landlords, and recommendations for solutions:
1. Inappropriate treatment of security deposits.
Local ordinances govern many aspects of rental security deposits, including the timing of deposits and the required payment of interest to renters when they move out. The interest on each security deposit account must be credited annually and records must be maintained. Some landlords don’t collect security deposits anymore to avoid these requirements, but that can leave you vulnerable in case there is damage to a unit.
If you manage your own rental units, be sure to learn the security deposit laws governing the jurisdiction in which they are located and abide by them.
2. Not reconciling the income properly.
You may have a payment processor collecting rent from some tenants, while other tenants pay their rent in cash. Reconciling these payments monthly can be time-consuming and confusing, resulting in payments being duplicated in your records. At tax time, the 1099-K you receive from your payment processor must reconcile with the cash in your bank account.
To the extent possible, require that all tenants pay their rent in the same manner, preferably through a payment processor that can provide clear records to you.
3. Struggling with property management software.
Popular accounting platforms such as QuickBooks Rental and Quicken Rental can help small landlords manage their rental accounting, but for some landlords they offer strengths in one area – say, tenant management – while they are lacking in other areas like building management. More robust applications such as Yardi and Appfolio may provide consistent support in all areas, but they come at a slightly higher cost.
Using the right property management software is one of the most important investments a landlord can make. Take the time to do online guided demonstrations of each platform and find the software and the payment plan that works best for you.
4. Not managing cash or exercising good cash controls.
Small landlords often run expenses for their rental properties through their personal checking accounts. This is a mistake because it makes reconciliation difficult.
Segregate your financial activity by maintaining a business bank account for your rental activities. If needed, you can make transfers back and forth between your personal and business accounts, but the moneys should not be comingled. It will also help minimize accounting fees since your accountant will no longer charge for the time it takes to hunt for business information among your personal spending records.
5. Not realizing when to seek help from experts.
Some landlords try to do everything themselves. They may be strong at one aspect of owning rental property but lacking in other aspects. Hiring a property manager can help ensure that all of the responsibilities of owning rental property are taken care of. Property managers may charge by the number of tenants a landlord has or by a percentage of revenue. They provide a point of contact for the tenants, as well as doing the accounting, performing physical maintenance and keeping good records.
Choosing the right time to hire a property manager varies depending on your circumstances. Some owners are comfortable managing several rental units, while others may need help managing only a few. The key is to recognize when you’re feeling overwhelmed or when certain tasks associated with managing rental units are falling behind. At that point, it would be advisable to hire a property manager and let the experts take care of what they know best.
We’re Here to Help
Small landlords can overcome the challenges of rental property ownership by investing in the right technology and professional relationships. Contact our Tax Advisory Service for a discussion about management solutions for your rental business.
