Spreadsheets, real estate-specific software, and all-purpose accounting programs like QuickBooks Online are some of the methods for managing rental properties.
The company QuickBooks has gained widespread recognition since its introduction about 40 years ago. Many investors are curious in how to set up rental properties with QuickBooks Online because the program is well-known.
How to Set Up Multiple Rental Properties in Quickbooks
Setting up multiple rental properties in QBO
The process for setting up multiple rental properties in QuickBooks Online is similar to the above, although there are several extra steps involved.
Let’s assume an investor owns a single-family rental (SFR) home and multifamily duplex with 2 units. One way to use QBO for multiple rental properties is to use 1 company and multiple classes, while the other approach is to create 2 different companies.
Before choosing a method and taking the time to set up QuickBooks Online, an investor may wish to speak with a real estate attorney or certified public accountant (CPA) to better understand the pros and cons of each approach.
Multiple properties under one company
- Create and name the Company, such as Bob Smith Rentals.
- Set up a Chart of Accounts referencing Schedule E (Form 1040)
- List each rental property as an individual Fixed Asset so that property values can be periodically updated and depreciation can be deducted from each property.
- Add the banking, credit card, and mortgage accounts used for receiving rent payments, paying operating expenses, and financing each property.
- Configure the SFR as a Class and assign it a name, such as 1411 Orange Drive.
- Configure the multifamily property as another Class and assign it a name, such as 1919 S. Jones Ave.
- Configure Sub-Classes under the multifamily Class for each unit of the property and assign the units names, such as 1919 S. Jones Ave. #1 and 1919 S. Jones Ave. #2.
- Create tenants as Customers by using the name(s) on the rental agreement.
- Set up rental income as Product and create Sub-Products for each type of rental income collected, such as monthly rent, late fees, and pet fees.
One advantage of putting multiple properties under the same company is that consolidated financial reports can be generated for an entire rental property portfolio, as well as for each property Class.
However, there are 2 potential problems with having multiple properties under the same company.
First, when rents are received and expenses are paid, a landlord or property manager must ensure that income and expenses are being posted to the correct Property Class and credited to the right Customer.
Also, by having more than one property on the same real estate balance sheet, it may be difficult to understand which assets and liabilities relate to which company. This can create issues when tax time comes around and for accurately calculating capital gains (or loss) and depreciation recapture when one of the properties is sold.
Individual companies with multiple properties
Having one company for each rental property is another way to set up multiple rental properties in QuickBooks Online. The risk of posting transactions to the wrong property or tenant is reduced, and financial reports are cleaner. However, there are also more steps involved when setting up 2 different companies, and a user will need to jump back and forth between companies when posting or reconciling transactions.
Here are the steps to follow to create 2 companies (one for the single-family rental used in this example, and the other for the 2-unit multifamily duplex):
Setting up a single-family rental company
- Create a Company.
- Set up a Chart of Accounts.
- List the rental property as a Fixed Asset on the Chart of Accounts.
- Add business bank, savings, credit card, and mortgage accounts.
- Configure the property as a Class.
- Create the tenant as a Customer.
- Set up rental income as a Product, with Sub-Products for each type of rental income.
Setting up a multifamily rental company
- Create a Company.
- Set up a Chart of Accounts.
- List the multifamily property as a Fixed Asset on the Chart of Accounts.
- Add the banking, credit card, and mortgage accounts for the multifamily property.
- Configure the multifamily property as a Class.
- Configure each unit in the multifamily property as a Sub-Class under the Main Class.
- Create tenants as Customers by using the name(s) on the rental agreement.
- Set up rental income as Product and create Sub-Products for each type of rental income collected.
There are a number of ways to keep track of rental properties, including spreadsheets, software specifically designed for real estate, and general purpose accounting software like QuickBooks Online.
QuickBooks was launched nearly 40 years ago, and has become a household name. Because the software is well known, many investors wonder how to set up rental properties in QuickBooks Online.
In this article, we’ll explain the steps to follow to set up a single-family rental and multifamily property in QuickBooks and discuss a free alternative to QuickBooks Online.
Key takeaways
- Rental properties can be set up in QuickBooks Online by following 8 steps.
- Because QuickBooks is general software, a real estate investor will need to spend time setting it up.
- An owner is named a Company, a rental property is named a Class, a tenant is named a Customer, and rental income is considered to be a Product.
- Understanding how a real estate chart of accounts works is also required to use QuickBooks Online for rental property.
- Multiple rental properties on QuickBooks Online can be created under a single company, or different companies can be set up for each rental property.
How to set up a rental property in QuickBooks Online
Setting up a rental property should be a relatively easy task.
However, the process to set up a rental property in QuickBooks Online (also known as QBO) is pretty complicated and actually requires following 8 steps.
Because QBO is general accounting software designed for every type of business, there are several hoops a landlord will have to jump through to use QuickBooks Online for a rental property business.
Here are the 8 steps to follow to set up QBO for a single-family rental:
- Create a Company and give it a name, such as Music City LLC or Orange Drive Rental.
- Set up a Chart of Accounts using Schedule E (Form 1040)
- List the rental property as a Fixed Asset on the Chart of Accounts so that depreciation can be manually deducted at the end of each year and property fair market value can be updated.
- Add each business bank account used for the property, including checking, savings, credit card, and mortgage accounts.
- Configure the property as a Class, in most cases using the exact address, such as 1411 Orange Drive.
- Create the tenant as a Customer, generally using the name(s) on the lease to ensure rental income and security deposits are credited correctly.
- Set up rental income as a Product, then create Sub-Products for the different types of rental revenue collected, such as monthly rent, late fees, and pet fees.
- Set up recurring invoices for Rent Payments if you wish to send a bill to a tenant each month instead of using a free online rent payment service
How to Record Rental Income in Quickbooks Online
Select “New Customer/Job” from the “Customer Center” after it is open. To access the customer input screen, select “New Customer.” As the contact details for the consumer, enter the name and address of the property. Include other pertinent information about the property in the custom data fields, such as the terms of payment, preferred method of payment, and reserve reserved for repairs. To save your new customer and dismiss the window, click “OK.” If you need to set up other properties, click “Next.”
To set up the specific tenants for each property, choose “New Job” from the “New Customer/Job” option. Enter the tenant’s contact information, including name, phone number, and mailing address. Use the tenant’s contact information rather than the address of the rental property itself; QuickBooks will use this information to create your monthly rental bills. If you’re done adding new tenants, click “OK,” otherwise click “Next” to add more.
To start inputting your rent receipts, select “Receive Payments” from the “Customers” option. From the drop-down menu under “Accounts,” select the cash receipt account. The “Customer:Job” drop-down list should allow you to select the right tenant. Enter the monthly rent payment amount. If you are entering rent for just one tenant, click “OK” to keep the receipt. Select “Group with other undeposited money” to proceed to the next cash receipt entry if you have rent from multiple tenants.
Why is recording rental income in QuickBooks so complicated?
Although receiving and depositing rent should be very simple in QuickBooks, recording rental income shouldn’t be too difficult.
It can be challenging to set up a rental property in QuickBooks, which is possibly why the organization offers a Live Bookkeeping professional to assist with the setup for $50 for a single session in addition to tailored bookkeeping support for a surcharge.
To ensure that accounts are first set up properly, it might be worthwhile to pay a little bit more than the standard QuickBooks price. At this stage of the game, utilizing QuickBooks incorrectly could result in inaccurate financial reports, errors on a tax return, or falsely accusing a tenant of paying their rent late.
Because it wasn’t designed for the real estate sector, QuickBooks might be challenging to use for rental property.
The universal accounting program QuickBooks aspires to be all things to all users. ZDNet reported that in 2019, QuickBooks Online had 3.2 million U.S. members and 1.3 million subscribers abroad. Although the organization doesn’t specify the proportion of subscribers who own rental properties, many of them run small businesses and are independent contractors.
Some property owners are migrating to the free Stessa software, which was created by real estate investors, for real estate investors, because QuickBooks can be difficult to use for rental property firms.
QuickBooks for Rental Property
Among the many ways you can use QuickBooks for real estate is to keep track of the revenue and costs incurred by your portfolios of rental properties.
However, small to medium enterprises are the main target audience for QuickBooks. QuickBooks is difficult to use for rental properties for the same reasons that make spreadsheets inappropriate for rental portfolios. Essentially, you need to keep your finances for each property separate while tracking the income and expenses for your rentals, ideally on a unit-by-unit basis. In fact, it’s nearly necessary to approach each property as a separate company.
This requires utilizing a different spreadsheet for each property when using spreadsheets, which can easily become out of hand. The QuickBooks user interface is also not intended for people who manage multiple different accounts.
In other words, you could be better off using property management software unless you’re an expert or have a lot of expertise with QuickBooks. It allows you to manage individual properties and is intended to make tracking income and expenses as easy as possible because it was specifically created for landlords.
Additionally, good property management software should have features that are specialized to the industry, like online rent collecting, customisable reports, and rental applications.
Given that QuickBooks is nearly a household name, many real estate investors are curious as to whether landlords can use it for accounting purposes related to rental properties. The short answer is yes, and a lot of landlords do it. Actually, the business only just described how to configure rents in QuickBooks Desktop.
At first glance, the process for using QuickBooks to manage rental property accounting seems simple enough, but it can actually be pretty complex.
This is due to the fact that each rental property is essentially considered as a separate business or rental property company filing. If you want accurate financial statements, you must ensure that you are crediting and debiting income and expenses to the appropriate property and account.
How Do Landlords Use QuickBooks?
You can set up corporate and client files as various properties in Quickbooks desktop editions. In addition to any fees associated with property maintenance, this will enable you to manage activities like collecting rent from renters and paying property owners and management firms.
It’s significant to remember that there isn’t a version of QuickBooks specifically designed for the real estate or property management sectors. In order to make the program perform the way a property owner would like, you’ll need to be flexible with it and possibly make a few modifications and alterations.
For example, in QuickBooks you’ll be able to create and manage two company files:
- Rental property company: For collecting rent, paying bills, and managing the property for the owner
- Property management company: A file for receiving income for managing properties
This will help keep the companies’ transactions separate from each other, allowing you to set up tenants and vendors, accounts and items, record security deposits, track the rent income, record expenses for each property, and pay the property owners. From the property management side, you’ll be able to set up property owners as customers, set up accounts and items, and record property management income.
If the property management business is comprised of several large properties or multiple complexes, it is advised you look into a more advanced system. A professional property manager could be better off finding a trust accounting system. Whatever accounting software is chosen to handle property management accounting, these facts remain certain:
- Once rent is received from the tenants, it needs to be disbursed to the property owners. This money should be kept in its own account and separate from any account that is used to pay expenses.
- Any money also received from the owners for the work you’ve done (your management fee) should be put into your own account.
Limitations of Using QuickBooks for Property Management
Although QuickBooks may be one of the most popular accounting programs for small businesses, this comes at the disadvantage of lacking rental management features particular to the industry.
Although it is feasible to set up QuickBooks in a way that can handle rental property accounting, as was mentioned in the previous section, it is not as simple as it could be with industry-specific software. In order to set up the software properly, a company will need to have a deeper understanding of it than the ordinary user, which will also result in a steeper learning curve for your staff.
Tenants do not have access to a client site where they may log in to check their monthly rent statement when you establish invoice payments for rent collection.
The property managers won’t have access to features like tenant screening, eSigning lease contracts, accessing tenant work orders, or sending mass emails to tenants (such as announcements). Although leaving a long-used accounting program may be difficult, many people find that having all of those features in one location makes more sense.
While QuickBooks may excel at handling its strongest features (such as tracking transactions and keeping track of cash flow), it may fall short for a property manager who lacks the patience to put up with these restrictions, for someone who wants more than just financial features, or for someone who wants a software designed just for them.
Chart of Accounts for Rental Property
Because they are necessary for creating a financial budget, charts of accounts and bookkeeping are crucial for real estate businesses. Additionally, complicated processes are used in the real estate industry for everything from purchasing and selling to property maintenance. Therefore, it’s crucial to maintain track of financial transactions. We’ll go over a real estate chart of accounts and bookkeeping techniques in this article.
Real estate agents can protect their financial security and keep organized for important tax compliance and collection chores by using a well-prepared chart of accounts. You may organize and streamline your company’s complex financial data with the real estate chart of accounts. Organizing data into comprehensible, logical account categories is beneficial. It also helps create financial models for real estate.
A real estate company’s chart of accounts shows all the accounts for your company organized in one place. It provides you with a bird’s-eye perspective of all of your company’s financial transactions. Due to the unique nature of the business and separate accounts, the real estate chart of accounts will be different from that of other firms.
You can use a chart of accounts to group all of your business’s transactions throughout a specific period of time. By dividing your revenue, liabilities, assets, equity, and business expenses, it also enables you to gain insight into the effectiveness of various parts of your organization. The chart of accounts also assists in financial budgeting and planning by listing all the accounts involved in your company’s daily operations.
The account names, brief descriptions, and unique account identification codes are all provided in the chart of accounts. The accounts for the income statement are listed after the accounts for the balance sheet.
Assets, liabilities, and shareholders’ equity make up the balance sheet accounts, which are further divided into numerous subcategories. Revenues and expenses are broken down further into sub-categories in the accounts that make up the income statement.
Setting Up the Chart of Accounts
The accounts that are specified while creating a chart of accounts largely depend on the type of business being run. For instance, a taxi company will have some accounts that are unique to the industry in addition to the generic accounts that apply to all companies. For instance, the taxi company will include a fuel expense account, which is not typical for businesses, but will omit an inventory account because it is a service company and does not keep stock.
Normally, a numerical system should be used to easily identify the accounts when listing them in the chart of accounts. Additionally, numbering makes it simple to record a transaction. Large firms typically use four-digit numbers because they have room for more digits as their operations expand, whereas small enterprises typically use three-digit numbers.
Each of the five major categories is given a set of numbers, with blank spaces at the end to accommodate future additions of more accounts. Additionally, the numbering needs to be uniform to make it simpler for management to roll up data from one period to the next.
Categories on the Chart of Accounts
Each of the accounts in the chart of accounts corresponds to the two main financial statements, i.e., the balance sheet and income statement.
Balance sheet accounts
Such accounts are required when creating a balance sheet for the business. Balance sheet accounts comprise the following:
1. Asset accounts
The asset account provides a list of all the categories of assets that the business owns. The account may include intangible assets (such as trademarks, patents, and software), current assets (such as cash on hand, accounts receivable, and
Each asset account can be numbered in a sequence such as 1000, 1020, 1040, 1060, etc. The numbering follows the traditional format of the balance sheet by starting with the current assets, followed by the fixed assets.
2. Liability accounts
Liability accounts provide a list of categories for all the debts that the business owes its creditors. Typically, liability accounts will include the word “payable” in their name and may include accounts payable, invoices payable, salaries payable, interest payable, etc.
Liability accounts also follow the traditional balance sheet format by starting with the current liabilities, followed by long-term liabilities. The number system for each liability account can start from 2000 and use a sequence that is easy to follow and compare in different accounting periods.
3. Owner’s equity accounts
Equity represents the value that is left in the business after deducting all the liabilities from the assets. Owner’s equity measures how valuable the company is to the shareholders of the company.
Some of the components of the owner’s equity accounts include common stock, preferred stock, and retained earnings. The numbering system of the owner’s equity account for a large company can continue from the liability accounts and start from 3000 to 3999.
Concluion
If you’re a landlord who has multiple rental properties, then QuickBooks will be your new best friend. The best part is, it’s easy and doesn’t require any special knowledge or costly accounting applications to set up.