Q&A: How do I add late fees for rental properties that are different amounts?

This question came up on the official QuickBooks forums (see also our forums). It’s a common scenario landlords with several properties face. We explain it in depth is sections 5.04 Manually Charge Late Fees and 5.05 Automatically Charge Late Fees in the kit.

How do I add late fees for rental properties that are different amounts?
We have several rental home with all different rent amounts, I have set up and memorized the monthly rent, but how can I add late fees without having to enter and calculate each one each time?

You are probably invoicing for rent already (that’s how we teach it, and do it ourselves), and then those invoices are memorized. Great.

Late fees are simple, although you’ll need to decide if it is a fixed fee or a percentage of rent. Set this up in your preferences. (Edit > Preferences…, or similar for mac / online users)

How do you do this? Use the Assess Finance Charges feature. Set a grace period, and then “Assess Finance Charges.” Each property’s invoice is different, so based on your preferences, each property’s finance charges will be calculated uniquely.

Note: some landlords choose to manually enter late fees, so that they get to review each tenant before charging them, in case special arrangements were made.

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Become a General Contractor

Many landlords encounter challenges with city inspections and permits when they try to do work themselves. You can subcontract out everything, or sometimes it makes sense to take the general contractor’s license exam and become one yourself.

Advantages:
  • If you are a general contractor, you can keep employees busy during slow times with work on own rentals.
  • If you are a rental owner, you are able to get permits and do work without subcontracting as much since remodling requires permits and licensing to do work on rental properties.
However, always subcontract HVAC, electrical, and plumbing work to licensed contractor. Some states only allow liens on property for nonpayment if the work is performed by a licensed contractor. This would apply, and be beneficial, if you were doing work for others.
Disadvantages:
  • Time to study and cost to take test. Depending on your level of experience expect to invest several months getting familiar with the building code books and practice tests.
  • Cost to renew license yearly.
  • Cost of bonded and insured employees.
Also consider: some municipalities or counties may have a remodelers license which may be less expensive to maintain.
For many hands-on landlords it is the next step to take to enable them to have higher margins and expand their professional offerings. For others, the time and cost is not worth the investment. Leave a comment if you want to share what your experience is.

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Q&A: Rent to Own in QuickBooks

If you’ve signed up a tenant with a rent to own structure, there are unique requirements for recording the transactions. Here’s a recent question from Gloria.

How do i book rental income that is no longer rent but going to be payments for a purchase of property for 250,000 tenant pays 3500.00 a month towards payment?

Create a receivable? Chart of accounts “options to purchase” Asset? Help …

Great question. This can be complicated, and we recommend you work with an advisor.

Rent to own, or an Option to Purchase, is a contractual agreement between buyer (lessee) and seller (landlord). The buyer purchases an option to buy the property later. In your books, that will be recorded in a liability account (just like security deposits). Buyer and seller likely decide on a purchase price then, or let it fluctuate with the market. Traditionally, a price is agreed upon in the option. Both parties negotiate the terms, and the buyer (lessee) has exclusive rights to purchase the property during that time period. If the buyer eventually buys it or not, the option to purchase is non-refundable. Then, each month as the lessee pays rent, a portion of that goes into the purchase price. Over time, they “prepay” for the purchase, in addition to pay rent.

The initial option payment is not income until the renter exercises the option, or forfeits the option and leaves. So the initial deposit of the option payment posts to a liability account “Option – 123 Main St.”

Then, monthly payments often are counted towards a future purchase of the property. For a $1200 rent check, it could post like the following journal entry:

Cash Dr $1200
Option – 123 Main St  Cr. $100
Rental Income  Cr. $1100

Sometimes in option agreements renters also need to pay property tax and insurance. It is the same as if you were paying to an escrow / impound account when you get financing from a bank. In the above option, it would decrease the rental income, and credit another liability account for Impound.

This is just a start, there are other things you still need to consider such as if the tenant surrenders the option, or exercises it.

Great question – you were on the right track asking this question. We look forward to a followup in the comments below.

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Free Cash Flow for Real Estate Investors

Image source: Investopedia

Intuitively, you may think of this as the cash flow as seen on a statement of cash flows financial statement. It is close, but not exactly the same.an experienced investor, you can use this as a factor in evaluating a buy out of your competition’s business, for instance.

Also, you may think of it as the money from rents you keep free and clear of maintenance and debt repayment. That also is close. Use pre-tax values and add back in depreciation and amortization expenses. It is the cash a business can generate after spending the money required to run or expand it’s business.

There are two ways to calculate free cash flow.

  1. Operating Cash Flow – Capital Expenditures. It represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base.
  2. EBIT(1-Tax Rate) + Depreciation & Amortization – Change in Net Working Capital – Capital Expenditure. Ex: EBIT is $10,000 adding back it D&A (+$3000) and we are at $13,000. The change in Net Working Capital is the change in current (non-cash) assets minus the change in current liabilities. Cap ex is the outlay of cash to capital investments.

A negative FCF is not necessarily undesirable. It happens when a company is making large capital investments.

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Rental Management in QuickBooks?

What do new landlords need to know about Rental Management in QuickBooks?

First, you need to decide if you use the online, mac, or windows version of QuickBooks. We use a mac laptop, but opt for VMWare and the windows QuickBooks Pro (discount purchase link). Why? It gives us all of the advanced features that are not yet present on the mac version. However, for 90% of landlords any version is equally capable.

Second, remember these crucial rules when setting up your company file:

  • Rentals you own are fixed assets
  • Rentals are also classes
  • Rentals are also customers

This will help you manage your investments more effectively. You can create reports like the following.

sample balance sheet - landlord accounting quickbooks

 

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Tenant Tracking

How do you track tenants? Landlords need to know current rent rates, late fees due, lease expirations, phone numbers, and more.

Do not buy custom software, instead use the trusted program your accountant already loves: QuickBooks.

In QuickBooks the secret to tenant tracking is in setting up your company file correctly. Save hours of time by allowing us to teach you the correct way, and give you a sample company file to download and play with.

The mini-mini version of our training:

Learn how to handle tenant tracking and billing. Move tenants in and out, set up and apply recurring charges, deposits, late fees, non sufficient funds, and more with QuickBooks for Property Management. Save time and reduce mistakes with automatic billing and late fee notices. Track lease expirations, unit anniversaries, occupancy rates, and tenant information.

 

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Q&A: Tracking Properties in QuickBooks (Class and Customer:Job?)

New landlords setting up with QuickBooks often ask the following question:

Do I need to set up both a Class for each property and a Customer?

Good question. Yes. We set up a Class to be able to slice and dice the P&L statement. We set up a Customer to track the current tenant in a property. Actually, we teach to have a customer for the property and a job for the tenant living there.

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Accounting for Mortgages with Principal and Interest

How do you make a mortgage payment in QuickBooks with Principal and Interest?

Track each mortgage payment by writing a check, and setting the breakdown inside it per principal, interest, and optionally private mortgage insurance or escrow.

Or, you can use the Loan Manager feature in QuickBooks.

The principal is going to pay down a liability account of the loan. The interest posts to an expense account. We explain more in the full QuickBooks for Landlords training guide, including how to be a hard money lender yourself and receive loan payments from others.

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Managing Investment Property Mortgages in QuickBooks

This is how to enter a mortgage on an investment property in QuickBooks.

If you are a landlord or property manager with QuickBooks, you will need to know how to track a mortgage on one of your properties.

According to the Chart of Accounts, you will need an account to track the mortgage. Create a new liability account (probably a Long Term Liability account as it will last over a year).

long term liability

If you are Refinancing an Existing Property

You can create a journal entry, or make a deposit to reflect the impact on your balance sheet.

If you are Closing on a Property and Entering the HUD-1

Capture all the details from the HUD-1. You may want to work with an advisor to help you make sure everything is correct. You can create a journal entry here as well.

More about the HUD-1, via Wikipedia

The HUD-1 Settlement Statement is a standard form in use in the US which is used to itemize services and fees charged to the borrower by the lender or broker when applying for a loan for the purpose of purchasing or refinancing real estate. HUD refers to the Department of Housing and Urban Development.

The borrower has the right to inspect the HUD-1 one day prior to day of settlement. The form is filled out by the settlement agent who will conduct the settlement.

Since 2010, the HUD-1 settlement statement also contains what is referred to as a Good Faith Estimate or GFE. This additional set of figures specifies estimated settlement figures provided by the lender upon application of the loan.

Borrowers may compare their Good Faith Estimate to the HUD-1 Settlement Statement and ask their lender or broker about any changes.

 

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Investment Property Bookkeeping

It’s about the end of the month, so soon we will be getting next month’s rent checks. No matter if you are a new or experienced landlord, your financial bookkeeping is crucial.

How do you track the income collected from investment property, and how do you forecast future expenses? (This will be an Accounting 101 course, more experienced readers may want to jump directly to our Landlording with QuickBooks training).

Every investment property owner needs to keep track of that money separate from the rest of his or her income and expenses. Ideally you have a landlording / property management legal entity set up already – perhaps an LLC. Even if you did not do that, opening another checking account can help to keep things more organized.

You need to separate your investment and personal funds.

  • Assuming you have an entity, it protects you from piercing of the corporate veil.
  • It makes taxes easier.
  • It helps tracking how much money you earn or lose.

When you have your new checking account, check with your bank about using smart phone apps to deposit your rent checks. Or use a high speed scanner they can provide you with. This way you don’t have to make a trip to the bank to deposit the money. Better yet, enroll your tenants in a direct deposit program to automatically transfer the money into your account.

You can be more or less aggressive in creating separate accounts for checking, security deposits, and the like. Note: some states require security deposits be kept in a different account than your regular business funds.

Here’s one possible setup of different accounts, from the husband and wife team at Rental Realities:

Checking Account – where all rent is initally deposited, and always holds the budgeted funds for PITI ($1,104), repairs ($87.50), and excess cash flow ($200). Cash flow we can apply to anything we want, like mortgage pre-payment, upgrades, miscellaneous expenses like office supplies, or saving for the next duplex.
Variable Expenses – this savings account includes the budgeted funds for things that are irregularly paid, including: future vancancies ($87.50), HOA dues ($50), and professional fees ($25). This savings account is automatically funded $162.50 from our checking account each month.
Income Taxes – I need to dig deeper into this, but my git-r-done way of estimating our tax burden was to start with total rent minus deductions for HOA dues, insurance, property taxes, and 75% of the principal/interest payment (only the interest is deductable). Then I take 25% of that number to get an estimated amount to save for each month, which comes out to $192.47. Rounded up, this savings account is automatically funded $195 from our checking account.

 

Security Deposit A & B – these were transferred to us at closing, and we named each one in ING as Security Deposit + the name of the address the security deposit applies to. I’m leaving those alone until a tenant moves out. The amount allocated to each fund is directly related to the balance sheet I created previously, with roughtly half of the positive cash flow money being allocated to income taxes.

Hopefully this gives you some ideas of investment property bookkeeping. We have a lot more in the blog, or order our full training kit on managing properties in QuickBooks today. It comes with a money back guarantee. And thousands of customers love it (read testimonials ♥).

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