The first year I purchased a rental property, I think the “shoe box” method was what I had used most of that year to track the property’s income and expenses. Basically, I saved all of the receipts and rent envelopes that I received in a shoe box (actually I think it was an expand-a-file). At the end of the year, I went through each rent receipt and each bill and wrote it on one of those large green and beige general ledgers. When I went to my accountant, it took about an hour and a half for him to correct the mistakes I made!
A big lesson that I learned early on, is that tracking your income and expenses throughout the year does a couple of important things. First, it helps you manage your rental properties better. You can more easily know the income that is coming in, who has paid their rent and who hasn’t. You also have a better handle on your expenses. Put these two things together and you now have a better snapshot of your CASH FLOW! Yes, keeping track of that important, but often elusive figure will help MAKE YOU MORE MONEY. So…
The second year I developed a spreadsheet. It helped, because I had also purchased another property and now needed a way to keep track of things as the year went by. I was now able to see which tenants had paid and who owed. I could also track how much money I had spent year-to-date. That spreadsheet worked for me until last year, when the number of rental units that I had accumulated finally made that spreadsheet just a bit unwieldy. However, if you are just starting out and don’t need anything sophisticated and/or you don’t have a lot of properties, then a spreadsheet like the one I created is a great way to track you income and expenses. It’s not fancy, but it works and I have had accountants compliment me on it’s functionality at tax time.
On the other hand, if you have a number of rental units, or plan to have them in the near future, I’d recommend moving up to the next level. That would be accounting software, like QuickBooks Pro. I began using QuickBooks Pro in 2008 after I realized that my spreadsheet just couldn’t effectively handle the number of rental units that I was trying to manage. QuickBooks Pro, as I soon found out, had the ability to track income and expenses easily and would also allow me to scale up to as many as I could handle! In addition, it allowed me to generate some great reports, like Profit and Loss, Collections, etc. One of the great time saving features that it offers is the ability to generate rent due invoices, late notices, eviction notices, etc. The ability to customize it to meet your needs is truly fantastic. Another plus is that many accountants use QuickBooks and can not only help you set it up correctly, but you can even email or give them an electronic file with you data on it and they can do their tax magic by directly utilizing that data.
There are some negatives, however. QuickBooks has a learning curve that is pretty steep. Compared to my $8 spreadsheet, expect to pay about $100 or more for QuickBooks Pro and need to upgrade to the new version every couple of years or so. For landlords and property managers, QuickBooks Pro is the version that is usually most applicable. I does take some time to initially set it up, but it does an excellent job once it is set it up correctly. There are Certified QuickBooks Advisors that you can pay to help set it up the right way and there are tutorial books out there to help, like one by Nancy Neville called The Easy Way to QuickBooks Beyond the Basics for Landlords & Property Managers and another called QuickBooks for Real Estate Investing and Property Management by Jonathan Wolter.
As for other options, many people use “ready to run out of the box” property management software that are user friendly and simplify the process of entering data and providing forms and reports for your property management endeavours. I haven’t found one to date that I thought was excellent enough to replace the first two options that I have used. However, they can add some additional functionality, so you may want to check some of them out.
One of the best things you can do is to start early in the year tracking your income and expenses. Not only will it help you get a better handle on your rental properties; it will also help save you a lot of time and headache when getting ready for your taxes next year!