Accounting turns your real estate rental from a side hustle into a business
It is expected that roughly 40% of the people in the United States will travel over the next month for the holidays. That’s over 130 million people! And not everyone is going to be staying with family. Many will end up in hotels, but a large number will also choose to stay in short term rentals such as Airbnb or Vrbo. This is great news for the owners of such properties… more rentals means more money coming in. How could that be a bad thing?
One thing could be what comes due next Spring… taxes. And since short term rentals are definitely a business, taxes will definitely need to be filed for that business. To make sure the right amount of taxes are being paid, this means good bookkeeping and accounting. But complying with tax regulations is only one reason for making sure your books are in order… and certainly not the best one.
The main reason to make sure your accounting is solid for any rental property goes back to it being a business and, in every business, accounting should be the primary tool in Business Management. Accurate accounting data is necessary to make intelligent strategic decisions for your property, such as adjusting rental rates, deciding on property improvements, or assessing the overall financial performance.
Other ways accounting is useful for your business are:
Financial Planning: Accounting helps you create budgets, forecast income and expenses, and plan for the financial future of your real estate operations. This planning is essential for making informed decisions and setting realistic financial goals.
Expense Management: Tracking and categorizing expenses related to your real estate properties allow you to identify areas where costs can be controlled or reduced. This is also immensely helpful in making sure you include all of the tax deductible expenses to reduce your tax liability as well as contributing to improved profitability.
Cash Flow Management: Monitoring your income and expenses through accounting helps you manage cash flow effectively. This is crucial for covering operational costs, servicing debt, and ensuring the financial health of your real estate business.
Tax Compliance: Proper accounting ensures that you are accurately reporting income and claiming eligible deductions, minimizing the risk of tax issues. It also helps you take advantage of available tax incentives and credits specific to real estate operations.
Property Performance Analysis: Accounting provides insights into the financial performance of individual properties. By analyzing financial statements, you can identify which properties are most profitable and which may require adjustments or improvements, comparing the financial performance of your real estate operations over time.
Decision-Making: Sound financial data allows for informed decision-making. Whether it's deciding on property acquisitions, determining rental rates, or allocating resources for property improvements, accounting information provides a solid foundation for these choices.
Loan Management: If you have loans or mortgages on your properties, accounting helps you keep track of loan balances, interest payments, and other financial obligations. This is crucial for managing debt and meeting financial obligations to lenders.
Legal Compliance: Real estate operations are subject to various regulations. Accounting helps you stay compliant with tax laws, reporting requirements, and other legal obligations, reducing the risk of penalties or legal issues.
Investor Communication: If you have investors or stakeholders, clear and accurate financial reporting through accounting builds trust and transparency. It provides stakeholders with the information they need to assess the performance and sustainability of your real estate business.
In summary, accounting is a fundamental tool for managing the financial aspects of your real estate operations. It provides the information needed to make informed decisions, ensures compliance with financial regulations, and contributes to the overall success and sustainability of your real estate business. If you’re interested in hearing more about how to do this or getting help in setting up your accounting, reach out to us here at Brightleaf and we’ll be happy to help!