The Importance of Tracking Property Expenses & How I Do it
For those of you that read my net worth posts, you know that I’m almost obsessive about tracking the numbers, and doing so in a way that presents the data in a few different formats. Something that is likely unsurprising about me is that I also believe in the value of tracking income and expenses with our property as well. This is particularly important around tax time, because one of the best things about investing in real estate is that you get to write off all of your expenses related to the property.
When buying our first property, I was lucky enough to connect with a CPA who happened to also be a real estate investor. Knowing that taxes are very real, and one of the benefits of investing in real estate is being entitled to deduct amounts paid into the property, I asked him to create a system for tracking purposes. I wanted something straight-forward that I could utilize to log expenses easily and efficiently so that when tax time rolls around, I wouldn’t have to try to add up all of my receipts and not know what everything was.
Pro Tip: Waiting to log expenses in bulk can quickly get out of hand. I couldn’t tell you what I spent money on a month ago, even with receipts, so I always log my expenses as soon as they pop up.
What’s the Method?
Check out my template here, that you can use to track your own costs if you want, or just to follow along as I explain.
It’s actually pretty straightforward to use the system that we set up- the basic concept is to log each of my costs in real time, using Google Sheets, adding a category to them as well as a note as to what the purpose of the expense was. The purpose of being overly descriptive with everything is to make sure that when I give this information back to him during tax time, he can quickly see if anything I’m trying to claim isn’t allowed, and I can use the data as a reference to remember what I was spending money on at the time.
I’ve been tracking the expenses related to our investments for the past four years- imagine trying to recall what you bought four years ago!
I’ve randomized the notes, data, and numbers in this template, but for the sake of transparency you can see all of the types of expenses that I’ve logged over the past few years across the tabs. Let’s walk through each of the important tabs below and see what you’re getting into if you take this on.
Property Basis Tab
This tab is one that I let my CPA handle for the most part. The purpose of the tab is do exactly what the tab name suggests, it’s tracking the basis of the property. What does that mean? The short answer is the basis is accounting for the original cost of the property, adjusted for factors like depreciation. If the property is ever sold down the road, the taxes owed on that sale would be determined by these numbers. This generally relates to capital gains taxes, but I am admittedly no expert in the tax space. I tend to give my CPA information, like what major expenses have I accrued in the year, and he decides whether or not those expenses get logged on this tab. The rule of thumb with this tab is that if there was a project that was over a certain amount, it would get depreciated over a number of years, instead of all at once in the year that it was accrued.
S Pine Tab(s)
This is the meat and potatoes of the entire spreadsheet, and where I spend all of my time throughout the year, dutifully logging expenses and income. Because the property is a 3-family house, there are four sections to this tab (common area, unit 1, unit 2, and unit 3). The majority of expenses that I accrue are generally logged in the common area section. These are expenses like lawn maintenance, plowing, water/sewer bills, etc. If I accrue an expense that can’t be tied to a specific unit, it falls into this section.
When I log an expense I need to consider a few different pieces of information. Those are:
What’s it for
For the Date column, I note the date that the expense is paid. The method for tracking your dates is something that you’ll actually want to decide on the front end. For instance, I get a water bill sent to me 30 days before it actually needs to be paid. I tend to pay that bill well before the due date, which means I have a few options of how I could log the date. I could either log it for the date paid, or log it for the date due. The reason I decided on date paid, is because that’s an easier concept for me to recognize while I’m going through the numbers. In the event of an audit, I can look back into my email, bank statements, and receipts specifically for the date that it was paid and should be able to present necessary evidence quickly.
The expense column is my first chance to log a reason for the payment. This is something I keep short and sweet, but also gets to the point. If the purchase is for a number of items, I’ll pick words that are as specific as possible without being too lengthy. I’ll have a chance to explain the expense in greater detail in my notes section, but if worded succinctly, I won’t need to rely on the notes column.
Cost is the most important column on the whole sheet! This is the amount that I’ll be able to itemize with our taxes and represents the entire purpose of logging this information. The sheet is set to round to the nearest whole number right now, but I do make sure to log the exact expense down to the penny when inputting data.
Columns D through L are meant as a means to start to separate costs into categories. Doing so actually helps with a couple of items. First, this is something that helps my CPA with visualizing the data and making sure that how I’m logging it is correct. Second and personally more important, these categories give me a snapshot that I can compare with years past. As I get into multiple properties I’ll be able to compare similar costs to see what improvements I might want to make to decrease expenses in other locations.
Columns M and N are my chance for additional notes, where relevant or necessary. For instance, now that I live across the country, I find myself making trips out to the property to make repairs, like painting, or light electrical and plumbing work. When I do so, I try to lump my costs of the whole trip together with a note in column M - this helps me assess whether I used my time wisely while I was out at the property. Column M is where I get painfully obvious about payment method, or who was paid, or the specifics about the transaction that will help me recall information in an audit.
What’s Logged in the Specific Unit Sections?
This is where the positive numbers are logged. Just like my ability to write-off expenses, I also need to input the amount of money that was brought in, so that Uncle Sam can take his cut. Any expenses that I can tie to a unit are logged here. Most obviously are the rent amounts, but I also get to log the costs of tools needed for a job, or items bought specifically for that unit.
There is one additional section at the very bottom of all of this that contains the total costs of mortgage interest, mortgage insurance (PMI), homeowner’s insurance, and real estate taxes. These are all items that are pulled from my mortgage summary at the end of the year and are only logged once, again for tax write-off purposes.
At the very bottom are the totals of everything above, for the sake of assessing all of the information in one digestible set of numbers.
Can I Get Additional Value From This?
Yes! You absolutely can- I use this sheet to track trends of what’s changing at my property and can use that to make macro-level adjustments where I deem necessary. As an example, let’s look at the water costs over the life of the property. The total’s that I have for that are $603 in 2016, $544 in 2017, and $655 in 2018. What that potentially tells me is that there’s a normal fluctuation in water costs of +/- $100 each year, or it could be a sign that costs will continue to rise in that category. This is something that I’ll have to monitor moving forward to see which answer is actually true. If I determine that the costs are rising faster than I would expect, I might opt to consider repairs on the plumbing to lower that. I might decide to raise rents accordingly, to cover those additional expenses that I’m incurring each year.
Another way that I could use this information is that I could start to understand the true turnover costs of a rental, and prepare for those. If you look at the expenses logged on the 2019 tab you can see that I spent almost $2,000 in travel, meals, and supplies to get out to the unit and perform repairs. Knowing that, I can now budget better as to what the true cost would be if I were to travel out to the property a second time for a similar event.
This is nice and all, but why should I do this?
The main reasons are:
To make sure you’re not forgetting your expenses. I didn’t track the numbers this way during my first year of real estate investment, that meant that I had to go through all of my receipts at the end of the year and try to make sense of them. Most receipts aren’t very descriptive and I had to play the role of detective to make sure I knew what I was logging.
As your real estate portfolio grows, you’ll want points of comparison to see which of your properties are performing well and which ones might be better suited in someone else’s portfolio. If you’re not getting the returns you expect with a property, you might as well dump it.
To track trends with your properties. It’s important from a goals perspective of making sure you’re on track for your expectations, but it’s just as important to see where your true costs are, and what they will might look like in the future, considering where they were in the past. Forecasting out expenses can help you plan for what you need your coming years to look like.
This is just one method of tracking expenses and it accomplishes the need of being intuitive and user friendly, not to mention convenient that I can log these straight from my phone in Google Sheets. I don’t need to be at a computer or in front of a scanner to get this information out of my head and into the spreadsheet. Even if you think my way is ugly, and you can come up with a better way, find something that works and stick to it. This all brings me to a question back to you: How do you track your expenses? I’m absolutely positive that my way isn’t the best, and I’m definitely open to learning more from you!
Let me know in the comments below, or shoot me an email, I’m all ears :)
-Mr Money Smith