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Part 1: Accounting for Rental Properties: Common mistakes and how to avoid them

Key Takeaways

  • Failing to crunch your numbers properly can lead you to make poor financial decisions for your rental business. Our guide will show you how to set up an accounting system to help you avoid costly mistakes.
  • Getting organized is the first step in managing your rental's accounting. Open a separate account for your rental business to collect rent from tenants and pay for expenses. Keep your personal and rental business transactions separate and store all financial documents digitally for easy retrieval.
  • To ensure accurate and timely accounting records, choose a method for tracking your income and expenses and stick to it. Learn the basics of accounting and taxes, but hire a professional to help you with anything you find overwhelming.

Published on Feb 27, 2023 | Updated on Jan 23, 2024

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If you’re like most landlords, accounting is likely the least glamorous part of your job. With a hectic schedule and other priorities demanding your attention, it’s tempting to put accounting tasks at the bottom of your to-do list, especially if you detest paperwork.

However, a robust accounting system is critical when running a rental property. Accounting is more than mindless number crunching—it’s the “language of business.” As such, it can help you better manage your rental to ensure it turns a tidy profit.

When accounting duties are neglected, this can lead to poor cash management, higher expenses, overpaying taxes, and ultimately lower profit margins.

In part one of our Accounting for Rental Properties series, we’ll cover common accounting mistakes that landlords make and how to avoid them. 

This is a close-up of a pair of hands on a desk. One hand is holding a pencil and resting on a calculator. The other hand is pointing to a number on a piece of paper.

Mixing business and personal expenses

Some landlords habitually co-mingle their rental property transactions with personal transactions. For example, they may deposit rent and security deposit cheques from their tenants into their personal bank account. 

Mixing business and personal affairs is never a wise move. Revenue and expense tracking will become a nightmare if you constantly need to distinguish between private transactions and those related to your rental business. Accurately reporting your income on your tax return will also be challenging.

The solution: Open separate financial accounts strictly for your rental property business. These include chequing and savings accounts, credit cards, and debit cards. 

Not differentiating property accounts

Tracking the financial performance of multiple rental properties will become problematic if you lump all revenue and costs under a single account. The reason is that the income and expenses associated with each one will likely differ. 

One of your units may have consistent tenants, while another may suffer from extended vacancy. One may incur only regular costs, such as utility fees, while another requires extensive upkeep or a pricey renovation. 

The solution: Consider opening separate bank accounts for each rental property you own. If that’s not feasible, you should still track inflows and outflows for each rental property separately. Accounting software can help with this task.

Inconsistent income and expense tracking

In the world of accounting, there are two ways to track your income and expenses:

  • Cash method
  • Accrual method

Under the cash method, you record income and expenses whenever you receive or spend money. Conversely, under the accrual method, you document income and expenses whenever you earn and incur them. 

Some landlords intentionally or accidentally switch between the two methods, leading to inaccurate financial figures and income reporting issues during tax season. 

The solution: Pick one accounting method to track your income and expenses and stick with it. Staying consistent is crucial. The Canada Revenue Agency prefers that business owners use the accrual method. However, there are instances where you can use the cash method.

Sticking with paper rather than going digital

Sticking with paper-based accounting is fine, especially if your rental operation is small and straightforward.

However, paper-based accounting has several drawbacks. The most notable is decreased productivity due to compiling, managing, and organizing physical documents. Clutter is also an issue, resulting in lost or damaged receipts and invoices.

The solution: Consider digitizing your business as much as possible. Look into purchasing dedicated accounting software to manage your rental operation. A wide range of small-business accounting solutions are available, some of which are free to use

This is a close-up of a person's hands as they work on a tablet. The tablet is on a desk and displays a bar graph. Beside the tablet is an open notebook, a pen, and keyboard.

Not considering automation

Some landlords prefer traditional methods for paying bills and collecting rent. But relying on paper documents, snail mail, and in-person payment processing requires more time and effort. It can also lead to missed bill payments, lost rent cheques, and higher transaction costs. 

The solution: Use accounting software and mobile apps to streamline your rental business’ finances wherever possible and feasible. 

Failing to retain financial records

Landlords who fail to store and organize their receipts and invoices properly may not immediately face negative repercussions. However, things will change drastically if the CRA requests copies of their financial records for review.

Should the CRA wish to audit your rental operation, you must provide all financial records related to your rental property. The CRA will only allow you to claim expenses as a tax deduction if you have proof of the transactions.

The solution: Always retain copies of your receipts and invoices, whether paper or electronic. Keep them in a central location and well-organized for easy identification and retrieval. Accounting software can simplify this task. Keeping a backup is wise as well, since electronic data can be compromised too.

Falling behind on accounting tasks

Some landlords tend to push aside bookkeeping to the bottom of their to-do list, as they view it as a chore. Unfortunately, waiting until the last minute can lead to higher expenses and more work to catch up on accounting-related tasks. 

Late bill payments and tax filings can result in interest charges and late payment fees. Entering transactions in haste can also result in typos that complicate balancing your books at year-end.

The solution: Set aside time each week to dedicate solely to accounting duties. By doing so, you’ll be able to keep your books up to date at all times and never feel rushed or overwhelmed. If you lack time to focus on accounting, that’s a sign that you need to hire a bookkeeper.

Not understanding tax laws

Managing your rental property’s books is critical to track revenue and expenses. However, it also enables you to report your rental income to the CRA accurately.

Failure to comply with the tax code can result in penalties and intrusive audits. It can also lead you to miss crucial deductions that would otherwise allow you to keep more of your income rather than handing it over to the CRA.

The solution: It’s prudent to outsource anything remotely tax-related to a bookkeeper or accountant. Not only will they be able to answer your questions and provide clarification, but they can also file your tax return and advise on the tax implications of your financial decisions.

Bookkeeping entry errors

Rental property owners who attempt DIY accounting will invariably make bookkeeping entry errors. The more transactions there are, the more likely mistakes will occur. As a result, incorrect and misleading data abound, leading a landlord to make bad financial decisions.

The solution: Learn accounting fundamentals to understand and familiarize yourself with the jargon. Knowing the ins and outs of accounting will help to minimize mistakes. Be sure to examine all your entries at the end of each month to catch any errors—this is precisely what professional accountants do. If you find accounting too much of a hassle to learn, you can hire a bookkeeper instead.

Spending too much time on DIY accounting

As a landlord, accounting is only one of many tasks you’re responsible for. Others may include:

Unfortunately, accomplishing all these tasks will prove difficult if you’re sitting at the computer all day entering bills. 

The solution: Hire a bookkeeper to handle the day-to-day accounting tasks so that you can focus on the big picture—maintaining and growing your rental business. 

Two people are sitting beside each other at a long table. The first person is holding a tablet and a notebook in one hand and pointing at the tablet with their other hand. The first person is looking at the second person, who is smiling and looking at the first person.

Our final thoughts

Accounting, when done correctly, will provide you with valuable financial information you can use to maximize your rental property’s profit. With accurate and timely financial data at your fingertips, you can:

  • Monitor the financial performance of your rental operation 
  • Address any issues immediately, such as past-due bills and missed rent payments
  • Spot opportunities to improve your profit margin by cutting expenses
  • Ensure you report accurate financial data on your tax return and pay your taxes on time
  • Keep your tax bill low by maximizing your deductions

For these reasons (and many others), setting up a proper accounting system that works for your rental business is crucial.

First, establish good record-keeping practices by opening separate financial accounts for your rental property business. 

Second, choose suitable accounting software and automate processes wherever possible. 

Third, familiarize yourself with fundamental accounting principles and tax rules to minimize the occurrence of mistakes. 

And fourth, make time in your schedule solely for accounting-related tasks. That way, you’ll stay caught up on your books—and avoid numerous headaches, especially during tax season.

As you’ve learned from this article, a proper accounting system can help you automate tedious transactions, such as rent collection. SingleKey’s Rent Collection tool also offers a speedy and hassle-free way to collect rent from your tenants online. Rent payments will arrive in your bank account within 3–4 days and are reported to Canada’s credit bureaus, encouraging your tenants to pay on time.

Get started today by visiting our Rent Collection page. Setting up an account only takes five minutes, and you can collect monthly rent from up to three tenants for free.

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