Budgeting for rental properties is an essential part of a rental business. The more accurate the budget plan you make, the more likely you'll be able to properly analyze your current financial situation to get the full picture of your potential earnings and create your financial goals.
Unfortunately, things don't always turn out the way you planned. Emergency expenses, one-time payments, or unexpected purchases might hold you back from taking your business to the next level.
There are a few ways to thoroughly prepare your budget for the upcoming year so that you can avoid any surprises in the future.
Let's take a look at the four ways to improve your budget for 2020:
1. Calculate monthly income and expenses.
Make it a habit to calculate your business and personal finances regularly. By keeping track of your monthly income and expenses, you can optimize your business expenses and learn how to set money aside. This kind of financial planning helps maintain a balanced budget and develop a competitive business.
Related: How To Price Rental Property: 4 Most Important Factors
2. Use a digital accounting tool.
Most landlords prefer to utilize digital tools that help when managing multiple properties. You can (and should) take a look at financial software systems or property management solutions that handle financial aspects of your rental business. If you use a cloud-based service, all financial data and a full transaction history will be stored in one place, so you can have easy access to it whenever you need it. Plus, some software tools offer the option to generate financial reports based on your filter settings.
In any case, any online accounting tool will help you to stay on top of your finances.
3. Understand the tax system.
Taxes always seems a little daunting for landlords. But it's important to understand how things work and what tax deductions you can take. Deductions may include loan and business card interest, property depreciation, insurance, fees and taxes, professional services, utilities, travel costs, equipment and suppliers, marketing costs, home office costs, tax preparation costs, etc. Make sure you document all the expenses you plan to deduct.
According to real estate professional and TenantCloud CEO Joe Edgar, "This tax season holds the potential for some great benefits, and understanding how you can utilize them is important." Once you get acquainted with your rental tax benefits, you'll be able to accurately plan your budget for a year ahead.
Related: Tax Season Is Coming
4. Encourage your tenants to keep track of rent payments.
Your tenants might not want to keep track of all the expenses (and that's their choice), but monitoring rent payments, at the very least, is necessary. For that, encourage your tenants to record each property-related transaction they make. Say they had to cover expenses related to urgent repairs when you were out of town; you'll probably want to return the amount paid for the services. That's why it makes sense to have it documented somewhere.
While a one-time expense won't have a significant impact on your budget, it's always better to be prepared for unexpected spending.
Getting an accurate picture of your finances gives you a sense of control over your money and help you make better spending decisions.
5 Tips For First Time Landlords: Choose Online Property Management Software
Top 5 Must-Have Property Management Skills: Tips for Managing Rentals