Renting your property out is the best way to passively make income out of your real estate investment.
However, renting out real estate is not as easy as looking up how to invest 1,000 dollars. It involves a great deal of knowledge of the real estate market and properly managing your properties and finances. All of which can be equally a struggle to deal with.
Whether you’re a seasoned or new real estate investor looking to find the perfect rental property, here are tips to help you manage your rental property finances. This can keep your business booming!
Choose your rental business structure
A business is a business. Once you start buying your first property for that purpose, you automatically become a business entity that leases out property.
Just like any other business, a rental property business can be structured as either:
- Sole Proprietor
- Limited Liability Corporation
Being a sole proprietor means that you don’t have a formal structure for your business (like partnerships and corporations). Therefore, you carry all its risks, returns, and rewards. As a sole proprietor, you put all your personal assets at stake in case of business losses and debt.
With a partnership, a rental business is pushed through with a partnership agreement and a limited liability corporation helps protect an individual’s personal assets in case of lawsuits and losses.
At the end of the day, the business structure you choose depends on how much (personal) risk you’re willing to take on these investments.
Keep a clear line between rental property finances and personal finances
Managing your rental property finances means that, as a business owner, you must keep a clear distinction and recording of your rental finances separately from your personal finances.
Keeping rental property finances and personal finances helps you:
- Get a clear view of how your rental property business is doing
- Avoid spending money for a business that is beyond your business budget out of personal money
- Easily identify the inflow and outflow of cash for your business
- Simplify computing profitability and taxes in the long run
Here are some ways how you can separate rental and personal finances:
- Keep separate records of rental and personal accounts
- Get separate bank accounts (preferably two) for your business finances, and a high-yield savings account for your personal finances
- Get separate credit and debit cards for business and personal use
Set prices and expectations on your rental prices
Managing your rental property finances also means managing how you set your prices and expectations about the market.
There are many factors to consider when trying to set prices for your rental properties, including:
- Knowing the market value of your property
- Getting as much information as possible from your competitors
- Figure out what season your property sells best
- Identify your location and your neighborhood
- How much profit do you want to make
“Some landlords pushing the 2 percent rule, or the rental value being 2 percent of the property’s value, only works as a vague estimate. At the end of the day, the market value plus your desired profit and your competition in the same market will decide how much you’re willing to charge for what your property is worth.”Andrew Pierce, Founder of Real Estate Holding Company,
Track rental revenue and expenses
One of the first steps in learning how to properly manage your rental finances is being on top of all your income and expenses. While revenue is less complicated (especially when you’ve set up a monthly rent value), expenses, on the other hand, can get pretty taxing.
What you can do is make a simple financial plan (which you can easily do on a spreadsheet) of all your projected revenue and expenses versus your actual income and expenses monthly. Doing this will help:
- Project net income monthly
- Reassess monthly projections so you can allocate your expenses more effectively
- Have historical data on all revenue and expenses as a reference for budget planning for the next periods
The idea behind tracking rental revenue and expenses is so that business owners get reliable data on the actual performance of the business and adjust monthly rates or expenses accordingly. No business owner wants a losing business. Keeping track of your financials is the only way to be on top of everything.
For general partnerships and limited liability corporations, financial statements matter a lot more than they do for sole proprietors. Identifying if an expense is a capital expenditure or an operational expenditure will make or break your business’ financial cash flow.
- Capital expenditures are usually big-ticket purchases and big property improvements. For example, lawn improvements, major electrical and plumbing repairs, roofing, and walling improvements. They help increase the property value. So, the cost of these expenses is usually divided over several years. Thereby reducing expenses recognized for one year and increasing net income.
- Operational expenditures are small, routine expenditures. This can include small repairs, taxes insurance, advertising, and legal and notarial fees that you need to recognize on your financial statements.
Allot a budget for repairs and maintenance
Repairs and maintenance of a property is arguably a landlord’s biggest expenses in a real estate rental business.
The tricky thing about these kinds of costs is that, aside from renovating rental properties and regular maintenance, there’s really no way of knowing when you’re going to have to do major repairs and how much it’s going to cost.
Budgeting too little means you’re risking spending money that’s allotted for something else. Budgeting too much would mean taking away finances that could have been used for other purposes.
“There’s no hard and fast rule on how much you set aside for unexpected major repairs and maintenance, but if you’re a beginner at real estate business, it would be good to set aside 1 percent of your property’s value. In the long run, you can take into consideration the quality and state of your property to assess how often you might need to conduct major repairs.”Dan Wood, Owner of AZ Valley Windows
Consider a property management software
Unfortunately, passive income from rental property leasing doesn’t exactly mean passive effort as well. There’s so much to consider when leasing out the property. This includes overseeing operations and maintenance, answering requests, managing inspections, rent collection, and much more.
However, gone are the days when landlords had to spend so much effort going back and forth with their tenants with text messages, personal calls, emails, and paperwork.
Now, tech is also leading the game to revolutionize real estate management through property management software. For example, RentRedi serves as an all-in-one platform solution for a landlord’s real estate needs. From automated rent collection, add-on rental property accounting software, listing units, signing contracts, screening tenants, and managing property maintenance.
Property management software gives landlords the ease of doing business. Whether through web or mobile apps, along with full live chat, phone, and email support.
If rental property finances are getting harder to manage, hire an accountant or bookkeeper
Hiring a bookkeeper or accountant to help manage your finances can greatly help in making sure all your financials are in order.
For owners with several real estates for lease, accounting for real estate can get especially complicated. Especially when it comes to tracking income and expenses across several properties, identifying and calculating useful life of capital expenditures, depreciation, and paying the correct taxes.
“So many businesses fail because they downplay the role of keeping financial records in order. These aren’t just numbers you show tax authorities. These numbers are telling you how well you manage your finances, how much income you’re earning, and how much cash you have to sustain your business operations—they tell the story of your business.”Jim Pendergast, Senior Vice President at altLINE Sobanco:
Setting your rental property finance goals
Running a business means that you have financial goals in mind. Setting these financial goals helps you manage your rental property finances and business goals like the following:
- Keep a budget—and stick to it
- You have a clear picture of where you’re going
- Set business and financial strategies that align with your goals
- Keep cash flows positive
- Evaluate what your business wants and needs
- Set priorities on where and when to spend
Setting a financial goal is important in strengthening your real estate business. Don’t just aimlessly look at your numbers and carry on another day. Managing your rental property finances is an essential part of starting a business. Eventually, it can spell the success or failure of your venture.