When investors first get into the world of commercial real estate, their minds usually first wander to how to find quality tenants, keep them happy, and make the most profit out of their investment. But if you’re a Houston landlord, you quickly learn that one reality of the job is having to be your own accountant and recordkeeper.
No one told you life was going to be this way. But now that you’re the proud owner of a Houston rental property, it’s become commonplace to be buried in accounting records and studying Texas landlord laws. As much as you might dislike this part of the job, efficient accounting work with your property is one of the top qualities needed to achieve true passive rental income.
Read on to get some advice on accounting and recordkeeping for landlords in Houston, TX.
Understanding the Basics of Rental Property Accounting
The foundational layer to accounting for your rental property is to keep your personal and business finances separate. The money you generate on your rental property are considered business funds. If they are mixed in with your personal finances, this will complicate matters for taxes or IRS audits. It also makes recordkeeping tricky because you have to separate personal and business finances each time.
This ties into how you will keep an organized system of financial records for your property. It can be easy to lose track of if you’re not actively managing the property on a daily basis. But efficient accounting for a rental means being able to easily locate records for tax time. It also means being able to keep a track record of tenant’s rent payments.
Implementing Efficient Record-Keeping Systems
So how does record keeping factor into how you can generate more income on your investment property? This comes from having thorough owner statements. Owner statements are detailed records on all income and expenses for your property to give a net cash flow for your investment. These should incorporate things like rental income, property expenses, and maintenance costs so you can refine your practices.
In order to easily keep track of all this information, you can use property management software to have a digital platform to keep all of your financial records. This gives you an easy way to audit your statements to improve upon your net income. These digital files should be backed up as well to ensure you are never at risk of losing them.
Tracking Rental Income and Expenses
To best keep track of your rental income, you should keep a record of every rental payment received from tenants. Especially if you have multiple tenants or properties, having documentation on each tenant's rent payment habits can back you up in deliberations. In the worst-case scenario, these records can back you up as a reasonable cause for eviction.
Another common mistake landlords make is not documenting every expense to the property, especially smaller ones. These can add up with the larger maintenance costs and are important to keep track of in entirety. Expenses alongside your income reports work in tandem to tell you how much profit you are receiving and help you allocate funds for renovations and repairs.
Handling Tenant Payments and Security Deposits
For the convenience of your tenants and the ease of your accounting, the process of collecting rent payments should be as streamlined as possible. While Texas law requires you to accept cash payments, our suggested primary method is through a tenant portal. This makes it easy for your clients, gives them a channel to contact you, and makes it easy for digital record keeping.
Security deposits are the other most common type of money you’ll collect from tenants. This is a deposit you will collect from tenants before moving in to cover you if any damage is caused by the tenant during their occupancy.
Texas does not have a cap on how much landlords can charge for a security deposit like some other states do. They also do not have strict rules on how and where you hold this deposit. However, you are required by Texas law to keep accurate records of tenant security deposits. This is so if you make deductions from the deposit, you can present records of why you are making those deductions.
Preparing for Tax Season
The time of year that your recordkeeping and accounting work is going to be the most vital is tax season. Taxes are the bane of many property owners and business owners. You’re going to need a complete and well-organized collection of all of your expenses and income from throughout the year.
1099 forms are perhaps the most important form for landlords during this time. You have to understand how to file these in cooperation with your tenants and your property manager. Don’t be afraid to reach out to a tax professional for assistance; they can help you maximize your deductibles come tax time.
Compliance with State Regulations in Houston
Texas is characteristically a state with fewer laws restricting how you conduct business. That being said, there are still a few laws to keep in mind that affect your rental property record keeping. They include:
- As touched on before, security deposits do not have strict rules governing how you hold them. However, you must keep detailed records on your tenants’ security deposits.
- When creating lease documents, you are required to provide the tenant with a copy of the lease agreement.
- In the event of an eviction, you are required to give the tenant a three-day notice to vacate before filing an eviction lawsuit.
The Accounting Expertise Houston Landlords Need
Accounting for your rental property alongside all the other demands of running a property can be overwhelming. A property manager can help. Property management companies will come with the accounting expertise to handle the documentation of your daily operations.
Terra Residential Services is one such property management company. We come with over 3 decades of Houston property management experience so you can rest assured that your investment will be handled with utmost care. We’ll be there for you, just like we’ve been there before for many other property owners in Houston.
Contact us today to learn more about our services.
