Is your Chester County, PA rental earning less than it should? If so, there's a good chance that your accounting process could use some work.
See, being a landlord requires doing a lot of accounting. Proper accounting helps you avoid financial errors, meet tax laws, and record rent payments. On top of this, correct data allows you to make better business decisions.
How do you ensure your accounting won't negatively impact your business? Start by avoiding these four common rental property accounting mistakes!
1. Using a Personal Bank Account
You should never use your personal account for managing business expenses. Doing so can lead to all sorts of errors and confusion.
For starters, mixing business and personal expenses makes them both harder to distinguish. If you end up facing legal issues, not having a separate business account may put your personal finances at risk.
Having two accounts also makes it easier to pay taxes on rental properties. Under PA law, you can deduct eligible expenses before paying taxes on profits. If you're not accounting for those, you'll pay more than you need to.
2. Mismanaging Your Cash Flow
Even with two accounts, you'll still need to manage your cash flow. Without proper cash flow management, covering expenses becomes much harder.
Cash flow mistakes come in many forms. These include not planning for emergencies, overspending, having low profit margins, and so on. This is one of the main tasks landlords tend to outsource to management firms.
Of course, the biggest cash flow mistake you can make is not sticking to your budget. Consider using past financial data to come up with a more realistic budget. Update your budget regularly to reflect changes in income.
3. Checking Books Infrequently
When it comes to rental property bookkeeping, it's important to do it often. Doing so allows you to catch errors and discrepancies early on.
For best results, you should review your financial statements once a week. Pick a specific time and stick to it. Consider using accounting software to make it easier to reconcile your accounts.
One task you should always find some time for is keeping track of accounts payable. Always compare them to your cash flow forecast to confirm you'll have enough money to pay bills on time.
4. Not Organizing Your Documents
Organization plays a key role in accounting for rental properties. If you don't know where your documents are, what will you do when you need them?
The simple solution to this issue is to keep all financial documents in one place. Both a digital folder and a filing cabinet will work. You should have a clear system for organizing documents, such as by type or date.
You also need to know how long you must keep your documents. For example, you should keep all property tax forms for at least three years.
Rental Property Accounting Made Easy
As lucrative as owning a rental property in Chester County can be, it does require a lot of effort. Make sure the effort is worth it by avoiding the four rental property accounting mistakes described above!
Need some professional help with your accounting process? Our experts at Key PA Property Management will take care of any accounting tasks for you! Fill out this form to learn more about our services!
