Focus on managing property and increasing property portfolio.
There are many moving parts in running a successful rental business. A great bookkeeping and accounting system is a crucial element in managing a property portfolio. Having a robust accounting system will help you plan for tax implications in advance. Not only will an accountant be of help at the tax time, but they will also provide on-demand financial help which will safeguard your business against debt or fraud. Forecasting of future expenses will help you plan better and save time. This can help one focus on managing property and on expanding the business. Historical financial data will help you forecast various costs with greater accuracy thereby ensuring that you are not financially derailed, viz. what needs to be done when maintenance costs increase in winter months or when internal/external walls require repairs?
Ensure rentals are being received on a timely basis.
Rent receivable reports run by accountants show the amount of rent the landlord has earned but not yet received from the tenant. Whereas the prepaid rent report shows the rent that has been received in advance. These reports help to identify delinquent tenants in ahead of time. When the balance of the rent receivable ledger is nil, it means the landlord has received all the rent that was due to him from the tenant.
Take advantage of available tax benefits.
Even with the flurry of activities around getting the property ready for rent and choosing the right tenant, it is imperative for the landlord to stay on top of taxes viz. capital gains tax, stamp duty, corporation tax etc.
Taxation planning ought to be done beforehand rather than afterwards as it will ensure an encumbrance free cash flow. An accountant makes certain that the landlord enjoys a tax effective property ownership. For example, as a landlord, you are entitled to GBP 1000 tax- free property allowance. However, this rule has some exceptions, and an accountant can help the landlord with the documentation required for the ‘full relief’. Also in various scenarios, where the landlord incurs expenses wholly and exclusively for property rental business, claims part expenses, incurs maintenance, and repairs costs, is required to calculate a profit or loss for more than one property or has tax implications on account of a jointly owned property, the documentation required and the tax liability in the different scenarios can be worked out by the accountant. Prior to 2017, mortgage interest could be offset against the self-assessment tax returns which have to be filed when letting out the property. However, the government began phasing out mortgage interest tax relief by 25 percent each year in 2017. This meant that 2019 was the last year that landlords could deduct the mortgage interest paid from their income. Presently landlords are given 20 percent tax credit for their property finance costs. Since tax rules change regularly, an accountant can best help the landlord navigate the rules and identify areas for maximum tax benefits.
Ensure surplus money is adequately invested.
Owning a property is owning a long-term financial asset, the benefit of which can be enjoyed for years to come. A rental premise usually gives the landlord residual monthly cash flow, which if invested adequately gives the landlord not only a guaranteed passive income for many years but also an opportunity to build reserves. Hence hiring a good accounting professional to help one to develop financial discipline for such investments is advantageous. Some of the ways in which the landlords can invest the surplus funds are as follows:
a) Maintenance and Safety. With the change in every season, the landlord should look at which items need to be cleaned or replaced. Ensuring fire alarms/ emergency lighting are in good working condition and investing in the best quality for the same not only keep the property safe but also ensures that the landlord doesn’t incur liabilities on account of faulty systems. Any white goods requiring repairs and replacement can be done through the residual cash. These small changes make the property attractive to the tenants.
b) Prepayments. Applying the surplus cash flow to paying down the principal balance helps to knock off a few years of the loan. This can eventually give the landlord the flexibility to invest in more buy-to-let property on mortgage.
Ensure all expenses are correctly accounted.
Landlords need to ensure business and personal expenses are accounted for separately. It is best to have a separate credit card and bank account which are used only for rental property expenses. In case of multiple properties, particularly when one has more than 3-4 properties, it is best to have a separate bank account for each property you own. For a given property one can have rental receipts going into one account along with any taxes and repairs for that property being debited to one single bank account. The expenses that can be reported include but are not limited to advertising, auto and travel, cleaning and maintenance, commissions, insurance, legal and other fees, management fees, mortgage interest, repairs, taxes and utilities.
Usually, lenders are less tolerant of buy-to-let mortgage arrears and they are treated to a certain extent on par with commercial loans. Hence, missing out on Loan EMI’s can have some serious consequences.
A monthly property management report describes how the property is performing and what aspects of the property require focus. By and large the following reports should be covered in the monthly management report:
Balance Sheet: helps you track your current assets and liabilities and tells you how much money you have to work with.
Monthly Income and Expense statement tells you how much money you made during the reporting period and how much you spent,
General ledger transactions are the backbone for all the financial reports. A general ledger scrutiny will give you a bird’s eye view of your rental business
The accounts payable report tells you how much money you owe against the property. Tenant receivables: tells you how much you are due to receive from the tenants and
The prepaid report tells you how much of your expense you have prepaid
The monthly bank statements with reconciliation ensure that your bank accounts match with your ledger accounts penny by penny.