Many investment property owners get into the industry because they want a way to earn passive income. However, not all property owners are aware of the importance of keeping accurate financial records of income and expenses related to their rental.
There are many moving parts to a rental property’s finances. But, no matter how complex it may seem, you must maintain accurate financial records for a myriad of reasons, as we’ll explore in further detail below.
Better Tax Planning
It’s common for investment property owners to dread tax season. Depending on where you live, you may owe both federal and state rental income taxes at the end of the year.
Luckily, property owners can take advantage of certain deductions to lower their tax bill. However, this requires you to maintain accurate financial records so your accountant has proof of your expenses and can help you take advantage of all deductions you’re entitled to.
More Accurate Property Valuations
If you ever plan on selling your property, thorough financial records will make it easier to value. Maintaining detailed records and prepared financial statements for each of the years you owned and rented the property makes it easier to share performance with interested investors.
This way, they can clearly gauge the income opportunity of owning the property. If you don’t have these records available, it can be more difficult to showcase the deal’s potential. Or, they may still be interested, but at a lower price than what you’re asking.
Less Audit Stress
It can be a nightmare for anyone to get audited by the IRS, but even more so as an investment property owner. But, if you’ve kept solid bookkeeping records, it can be a much more straightforward process.
In doing so, you can avoid extra expenses to hire a firm to support your audit and retroactively organize your records. Plus, you can have the peace of mind that your reporting over the years has been accurate, giving you less of a chance that you’ll face penalties or fines from the IRS for unpaid tax liabilities.
Easier to Control Expenses
Without a clear and accurate view of your rental property finances, it’s hard to understand where you stand financially and assess what you can do to improve your margins.
In other words, you may know how much rental income is flowing in each month. But, do you have a good idea of where your cash is going? Many investment property owners spend a certain amount each month on operating expenses like maintenance and repair costs, outsourced property management fees, marketing expenses, and more.
Thus, with accurate financial records, you’ll have a solid understanding of your cash flow trends, allowing you to be more strategic with your spending and capture more of your rental income.
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Written by Bailey Schramm in partnership with checkworks personal and business checks.