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Posted on: 11/09/2008
Posted by: RiyahsDream12
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The Importance of Record Keeping
You can set up ledgers to account for each income and expense item you will incur in the operation of your property. These include:
Income from Rents
Income from Other sources, such as coin laundries
Common Area Maintenance (CAM) charges in office buildings
Advance Rents and Security Deposits:
Some states require you keep security deposits in a separate account and pay the tenant interest on that money while you are holding it.
When a tenant moves out, you do a final inspection of the unit and determine how much, if any, of the security deposit you will keep to cover any damage done by the tenant. Normal wear and tear is not chargeable.
Advance rents are yours to keep. The purpose is to have an extra months’ rent paid in advance to cover the rental if a tenant fails to pay one month or moves out unexpectedly and without notice.
Operating Expenses: Set up a separate ledger sheet for each of the operating expenses you have in the operation of the property. These can include taxes, insurance, payroll, water, electric, trash removal, repairs and maintenance, etc.
It is important to review these expenses items on a regular basis to insure none of them are suddenly getting out of line and, if so, why. It is used to pay the final rent payment if a tenant lives out the full term of the lease.
You will have mortgage amortizations schedules when you close on the property. Set up ledger pages for each mortgage showing a monthly breakdown of total mortgage payment, interest deducted and principal payment. You, or your account, will need this information at tax time. If also keep you abreast of how far your mortgage principal balances are being reduced.
You will want a section set up for your costs in the property. This includes your acquisition costs, renovation costs and closing costs.
Although it is probably not necessary as part of your accounting records, you need to set up a record of how much value the repairs you made have.
You may have only spend $2,000 out of your pocket, but having the work done for you would have cost $7,200. When the time comes to sell, this will be important, both to the IRS as well as a potential buyer.
You can show the buyer how much money you spent renovating the property. (You are not lying. Your time and labor was worth something, too.) You’ll also need a section to show the annual taxable depreciation you took.
During the initial period of time, right after you purchased the property you may have had carrying costs to keep the property at a breakeven level.
This will show up in your profit and loss statement for the end of the year reporting.
Setting up a simple bookkeeping system is not difficult with the software that is available today. A few minutes a month is all that it takes to keep your records current and be able to know where you stand at all times.