Setting up a rental property in Quickbooks Online

The sole purpose of this post is to document the process by which I bring a new rental property into my accounting system, Quickbooks online.

Create Your Asset Accounts (3 total)

Think of it this way, you will need one account (or in this case, one account with two sub-accounts) to track the value of the asset and you need another one to track the debt associated with financing the purchase.  I use one parent account called simply the name of the property.  The two sub-accounts keep track of 1) the original cost of the property and 2) the total depreciation taken to date.  This is what it looks like when all the accounts are lined up.

Screen Shot 2015-02-02 at 10.14.52 AM

Let’s make this a little bit easier.  When you set up your original asset account, Quickbooks will actually ask you if you want to track depreciation for the asset.  If you check the box that says “Track depreciation of this asset” you will be asked to enter your current depreciation and effective date.

Set up rental property asset account in Quickbooks Online

I usually use the Category Type of “Fixed Asset” and the Detail Type of “Other Fixed Assets” for rental properties for no other reason than that the other options don’t seem to apply well to houses.  The screen shot on the right is what the asset account setup looks like.  This one step will actually create three separate accounts, all the “Fixed Asset” accounts needed so you do not actually have to manually create the “Original Cost” and “Depreciation” accounts associated with a property.

Create your liability account

Bookkeeping is like Newton’s Third Law of Motion, except instead of “for every action” think of it as “for every asset created, there is an equal and opposite transaction or set of transactions to offset it”.

You can’t just create an asset out of thin air and put it on your books, it had to come from somewhere.  Did you pay cash for it?  Well then there should be a transaction in your cash accounts that shows that.  Most likely you financed it somehow and so you need an offsetting debt account.  I will show you how to set up the debt account then get into a few more details on the actual amount of the debt account.

aSet up of debt account associated with rental property

For home loans, I use “Long Term Liabilities” as the Category Type and “Notes Payable” as the Detail Type.  The rest is fairly self-explanatory.  This is not considered a sub-account so do not check that box.  Name the loan the address of the property plus “loan”.  So if the address is 101 N. Main, name the account 101 N Main Loan.  This way you can pull all of your loans up easily in your Chart of Accounts by just searching for “loan”.

Also remember, all the account that you just created are asset and liability accounts and so they will not show up in your P&L Statement, only on your balance sheet.  No expenses were involved thus far and no income was involved.  You created an asset and it’s corresponding liability.

Opening Balance Equity???

When you create an asset account, there needs to be a corresponding liability created at the same time.  When you create the asset account through the account creation wizard, Quickbooks actually creates this liability account for you and calls it “Opening Balance Equity {4}”.  Oh and by the way, when you create a liability account, Quickbooks also creates a temporary asset account called, you guessed it, “Opening Balance Equity {5}”.

Think about these account this way, you want to create an asset account (the house itself) and a liability account (the loan on the house) but ended up with two asset accounts (the house PLUS Opening Balance Equity {5}) and two liability accounts (the loan PLUS Opening Balance Equity {4}).  This is redundant, messy, and confusing.  What you need to do is manually offset the asset account with the loan account, and then manually offset the loan account with the asset account, thereby getting rid of all of the Opening Balance Equity accounts.

Here are the steps to do this:

Screen Shot 2015-02-02 at 11.14.36 AM1.  Run a Balance Sheet report.  Scroll to the “Equity” section at the bottom and click on whichever “Opening Balance Equity” account was created.  Assuming the loan and the asset created are the same value, the actual value of this account will be zero since the two transactions offset eachother.

2.  You will see two journal entries to choose from, click on one of them.  It should look something like the journal entry below.  The Original Cost of this asset is offset by a temporarily created Opening Balance Equity Account.  Since we want the asset purchase to be offset by the loan instead of the temporary account, we just change change the account from Opening Balance Equity {4} to “101 N Main St Loan.

Screen Shot 2015-02-02 at 11.11.35 AM

Changes to:

Screen Shot 2015-02-02 at 11.24.56 AM

3.  Now remember, there were actually two journal entries associated with Opening Balance Equity.  Since we have already successfully and completely accounted for the fact that the house (asset) was offset by the loan (liability), we can actually delete the other journal entry, which in our case looks like this:

Screen Shot 2015-02-02 at 11.26.41 AM

One way to think about this is to picture that the original asset purchase was offset by a Opening Balance Equity liability, which in turn was offset by a Opening Balance Equity asset, which in turn was offset by the loan.  We just removed the two middle steps and directly joined the asset and liability.

What about closing costs and down payments?

In reality, no real estate transaction is limited to an increase in assets and liabilities.  In other words, it’s never just a balance sheet transaction.  You most likely have a down payment and closing costs that you pay in cash.  I will write another post about the closing cost Quickbooks Online transaction but for now just remember that the offsetting transaction for the asset will end up being partly the loan and partly cash and will need to be notated as such in these accounts.  Likewise, the closing costs will need to be accurately recorded as expenses.

If you have any questions regarding the setup of rental properties in Quickbooks Online, please feel free to either comment below or contact me here.

 

 

Networking is just hanging out … most of the time

Networking is so easy in college.  In college, everyone seems constantly primed and ready to network.  Thirsty Thursday anyone?  Of course, nobody actually calls in networking on campus.  It’s only when you start to transition into the “job market” that this concept that is so very innate gets a new name, a new set of rules, and somehow becomes a mysterious process that is apparently absolutely necessary to landing a job.

Networking is nothing more than meeting people, creating real connections, finding common interests, and spending time together.  If you’re looking at networking as that necessary evil that stands between you and your dream job, then you’re thinking about it all wrong.  It’s not about getting to know someone to get something from them, it’s simply about actively participating in society, something we as humans are hardwired to do.  In college you presumably spent lots of time with friends, probably did some sort of volunteer work, and maybe were in a few clubs or sports.  That’s networking!  There’s really no mystery to it.

How do you apply this to your life now?  Well … spend time with friends, do some volunteer work, and join a club or sport.  Guess what?  You can still do all of those things with a job!  Even if you are networking with the sole purpose of finding a job, this tactic still works.  The people you meet in these low pressure situations are going to be the ones that know someone in the company that you’re trying to get into.

Life is complicated enough, don’t overthink this one.

Yearly Income Report – Fiscal Year 2014 Profit and Loss

Below is my 2014 Yearly Income Report, with years 2013 and 2012 as comparisons.  The purpose of these reports is to give beginning real estate investors a real idea of what it’s like to invest in houses.  In 2014 I had 9 houses (14 rental units) in service.  I have chosen to have my properties professionally managed and have learned the hard way that I’m not well-suited for actually doing the property management myself.

2014 ended a very tough spell with a tenant bankruptcy and some extremely serious repairs (same tenant) which all told cost me about $25,000 over the course of 2013 and 2014.  Depreciation expenses are not yet notated in this report, once my accountant figures that one out, I’ll get them added.

As always, feel free to contact me with any specific questions on this report.

FY 2014 Profit and Loss Report

 FY 2012FY 2013FY 2014TOTAL
Income
--- Application Fee0.0035.000.0035.00
--- Reimbursable Expenses736.29537.110.001,273.40
--- Rental Income42,951.7466,053.4091,666.26200,671.40
----- Discounts/Refunds Given(441.38)(30.00)(70.00)(541.38)
----- Fees for damages0.00450.00439.00889.00
----- Late Fees1,260.00615.00250.002,125.00
----- Legal Paid By Tenant0.000.00415.00415.00
----- Pet Fee0.00300.00700.001,000.00
----- Utilities Paid by Tenant0.00668.661,380.152,048.81
--- Total Rental Income43,770.3668,057.0694,780.41206,607.83
--- Returned Check Fees Collected20.000.000.0020.00
Total Income44,526.6568,629.1794,780.41207,936.23
Gross Profit44,526.6568,629.1794,780.41207,936.23
Expenses
--- Bank Charges297.500.0036.26333.76
--- Closing Costs0.001,476.000.001,476.00
--- Dues & Subscriptions0.000.001.951.95
--- Inspection Fee0.00495.001,737.752,232.75
--- Insurance2,652.484,767.335,302.8712,722.68
--- Insurance - Business use of hom10.100.000.0010.10
--- Legal Fees518.002,523.001,028.004,069.00
--- Meals & Entertainment31.860.000.0031.86
--- Mortgage Interest14,916.6219,673.9816,368.3850,958.98
--- Property Management Fees1,381.767,855.187,437.0516,673.99
----- Lease Renewal Fee0.000.00453.75453.75
----- Leasing Fee0.000.002,546.002,546.00
--- Total Property Management Fees1,381.767,855.1810,436.8019,673.74
--- Property Taxes9,595.6421,122.9720,428.1951,146.80
--- Repair & Maintenance9,767.7910,218.6812,617.7732,604.24
----- Appliances0.000.002,125.942,125.94
----- Carpet0.002,529.841,895.854,425.69
----- Cleaning0.000.00429.69429.69
----- Electrical0.000.001,381.251,381.25
----- Flooring0.000.002,727.952,727.95
----- HVAC Maintenance0.000.001,649.251,649.25
----- Painting4,887.274,887.27
----- Plumbing Maintence0.000.002,582.742,582.74
----- Snow Removal / Landscaping0.000.004,167.484,167.48
----- Supplies / Hardware166.870.005,558.175,725.04
--- Total Repair & Maintenance9,934.6612,748.5240,023.3662,706.54
--- Taxes / Licencing150.002.500.00152.50
--- Utilities2,142.022,418.746,570.2011,130.96
Total Expenses41,630.6473,083.22101,933.76216,647.62
Net Operating Income2,896.01(4,454.05)(7,153.35)(8,711.39)
Other Expenses
--- Depreciation14,290.7327,021.82TBD41,312.55
Total Other Expenses14,290.7327,021.82TBD41,312.55
Net Other Income(14,290.73)(27,021.82)TBD(41,312.55)
Net Income(11,394.72)(31,475.87)(7,153.35)(50,023.94)