Are Your Property Management Account Systems Costing You MONEY!

Are Your Property Management Account Systems Costing You MONEY!

I am excited that Propertyware sponsored this article. As I can tell you first hand that having a great property management accounting system in place is the key to landlording success!.

When we first got started as landlords, the daunting property management task were listing the house for rent,  creating a rock solid lease, placing a tenant and then managing the house. 5 years later, that is easy peasy. It’s our property management accounting system that is  KILLING ME. The worst part was it’s gotten HARDER not easier.

I quickly realized that doing our books were SOO much more complicated than I first thought.

As you get more experienced in Real Estate, the thing that you quickly learn  is you are probably doing your taxes wrong.

You are either…

Under-Claiming  Your Expenses (High Rental Income, High Taxes)

Over-Claiming Your rental Expenses (Low Income, Lower Taxes)

Under -Claiming Your Expenses

In my opinion, this has the LEAST negative effect on you overall. When you under-declare expenses, you have higher income causing more tax to be paid. While paying more money than you are required, is never fun. You will never lose a house due to not qualifying.

Over-Claiming Your Expenses

In my mind this is the worst as it has some pretty large long term implications.

  • Loss of Immediate Cash Flow
  • Impacting Future Ability to Qualify for a Mortgage
  • Creates a Sense of Over Improvement

Loss of Immediate Cash Flow

One of the things that I see most often on different forums is the comment, don’t worry about charging them for damages, paying extra repairs, non-value added improvements, etc… you can expense it on your taxes. While that is true, you certainly aren’t “making” money. Would you trade someone a $1 for 15 or 25 cents. You answer better be no, otherwise email me, because I would be happy to give you 15-25 cents for your dollar.

Expensing it on your taxes only returns 15-25% of the money. This is a great for actual expenses but wasteful to spend money for the sake of a higher tax return.

Impacting Future Ability to Qualify for a Mortgage

Depending on your goals either a huge or non-important issue is the impact of declaring expenses on future loan qualification ability. The higher expenses reduce your “income” on your taxes. This thereby reduces the income that you can report in qualifying for your next loan. For many this lack of ability to report income can be a deal breaker. As the long term implication of lack of reinvesting and building long-term capital can be MUCH higher than the taxes you would have paid on a less aggressive tax plan.

I personally am VERY watchful of what I spend. While there is always the tiny minority that finds the opposite true, this has not been true in my experience. I have not yet found being overly spendthrift helpful in any way other than forcing landlords out of this industry through heartache.

Over Improving

The other thing that one has to be careful of is over improving. I have heard the reason for spending money often is it “adds” value. While there are some improvements that truly add value to the house, most things just make it look better. So while these improve might allow your house to fly off the shelf faster and feel more like home to you. More often than not it is wasteful spending that if you are purely in it for a business is “throwing” money away.

Luckily these issues can be solved in 2 ways.

Good Property Management Practices

As my friends at Propertyware discuss in their article, 5 Things You Need to Know About Property Management Accounting. Through good procedures you can make sure that your data is all correct and ready to go. Allowing you to accurately understand your current position

Talking to BOTH your CPA and Your Mortgage Broker

Once you have great data by followings the 5 steps Propertyware discussing in their article,  5 Things You Need to Know About Property Management Accounting (without system, garbage in creates garbage out) you can take this data to your CPA AND your Broker to create a strategy. This way you pay the LEAST amount of taxes yet never miss a single deal to due to not being able to qualify.

What has been your experience? Have you had trouble qualifying?

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