Invariably, one common question that new landlords almost always ask is, “What is the best way to track my rentals’ income and expenses?”
Basically, there are three ways to routinely track rental property income and expenses:
1. The “shoebox method”
2. Use a spreadsheet
3. Use a database
The Shoebox Method
Now, the “shoebox method” is the one where you simply put all the rental income bank receipts and all of the rental property expenses into a big shoebox and try to make sense of them the night before you go to your accountant. For obvious reasons, I don’t recommend this at all. This method is bad for a number of reasons. First, you are bound to miss (or forget) important items surrounding the income or expense item. Second, it’s not the way to run a good business… if you don’t know how much cash flow (income minus expenses) your properties are generating throughout the year, how can you make sound business decisions on the timing of repairs, improvements or even the amount of profit you can take out of the business.
Spreadsheets
Use of a spreadsheet is very easy, economical and can give you a snapshot of your situation very quickly and easily. You can do a “manual spreadsheet”, by purchasing an “analysis pad” at almost any retail store that sells paper supplies. You then fill out the dates that you had received income or paid expenses in the rows and the income and expense categories in the columns, and do the manual calculations as needed. Although it’s fairly easy, it certainly isn’t efficient. Manually doing calculations every time you want to see your financial situation is pretty tedious and potentially inaccurate.
You could also create or buy an income-expense spreadsheet for use on your computer. The advantage is the ease of setup, ability to reuse the same template year after year, ease of data entry, relatively simple ability to modify or customize, ease of printing, and automation of calculations. Personally, I use a spreadsheet like this because I can enter data quickly and easily and see a “snapshot” of my income, expenses and cashflow at any time during the year. Being able to look at your cash flow “at a glance” is extremely valuable. If you save multiple years of data, you can do some great comparisons each year, especially if you leave the format of the spreadsheet unchanged from year to year. If you use Microsoft Excel (spreadsheet program) or something compatible, I have created a fully functional Rental Property Income & Expense Spreadsheet template that you might be interested in using. I have found that for most landlords who own single family or small multi-family units, this is one of the simplest and easy methods to use, and anything more sophisticated tends to be overkill.
Databases
Databases are the more sophisticated way of tracking rental property information. Most are actually more “Rental Property Management Programs.” Shop carefully, an “off the shelf” program may lack flexibility, like limiting on how you enter data, the type of information you enter and the reports you get. There are several advantages, however, like the ability to keep multiple years of income and expenses in one database and the ability to enter detailed information about tenants and properties. Databases can also be useful if you own a lot of properties and want to automate some functions, like tracking which tenants are late with their rent, or print rent receipts/invoices, write checks, etc. There is a very large difference between the various database software products, so shop carefully. For similar price points you may find a program that is very limited in function, while another has all the “bells and whistles.” I have a couple of links to rental property database software at my website if you wish to explore this route. Some companies that I list at the my site even even offer free “lite” versions which are fully functional programs that limit the number of rental property units that you can enter into the software. The more fully functional programs generally cost somewhere between $99 and $199. Do your research and try as many “free trials” as possible before you buy!
As for me, personally, I have used paper ledgers, spreadsheet programs and databases. They all have their unique points. However, in the end, I keep returning to my simple (yet effective) spreadsheet program because of it’s ease-of-use and ability to see a “snapshot” of my income, expenses and cash flow almost instantaneously. I also like the fact that I can modify or customize it on my own, if needed.
The choice is up to you. Generally, I think if you are just starting out, a spreadsheet is often the most inexpensive, simple, and easy way to track your income and expenses. As you get larger and larger, a database may make sense because of the ability to automate more management functions store more information about your properties and tenants. Just do me a favor… don’t use the “shoebox method.”
Regards,
Steve
Steven A. Boorstein
Author
How To Buy Your First Rental Property and Beyond
www.howtobuyrentalproperty.com