Pencil and Paper or Point and Click

JEANINE GAJEWSKI
UNITS
March 15 2007


Technology has created options for independent rental owners to effectively track income and expenses when preparing to file taxes.

There are as many ways to track income and expenses in preparation for tax time as there are independent rental owners. And while some owners stick to time-tested pen-and-paper methods and others invest in cutting-edge property management software, every owner faces filling out the IRS's Schedule E (Form 1040) by April 15. And for many owners who do not have an organized and accurate accounting method in place, that process can be daunting.

"I know many owners who don't know if they made money or lost it until their accountant tells them," said Don Werner, Owner of Denver-based Performance Real Estate Management and 2005 NAA Independent Rental Owners Committee Chair.

According to Jeff Young, Past Chairman of the Arizona Multihousing Association's Independent Rental Owners Committee and a financial planner and Senior Vice President at First Financial Equity Corp. in Scottsdale, Ariz., accurate record-keeping and the ability to access those records is the key to tax-time success. "You must begin Jan. 1 to take steps to do your taxes right," Young said. "The best software program in the world is not going to help the messy record-keeper."

Simple and Effective

Before computers and complex property management software, independent rental owners had only pen and paper to help them keep track of income and expenses. And for many, this simple solution still proves to be the most effective.

Young uses only his checkbook register and a system of envelopes to keep tabs on income and expenses for his properties. Two envelopes are earmarked for each month, one for "bills paid" and the other for "receipts." One more envelope is for the occasional cash receipt for something like a box of nails from the hardware store.

"For example, if I get a utility bill, I pay it and the invoice goes into the "bills paid" envelope," Young said. "If I buy a dishwasher, the receipt goes into the "receipts" envelope for proof should I ever need it."

Young has a separate credit card and checking account for his properties, which he does not commingle with his personal finances. In his checkbook, Young uses a yellow highlighter to denote the separations between months, and each first of the month, he lists all his properties in the checkbook--even before the rent checks come in--as a way to keep track of who has paid.

"If I have a vacant property, I don't leave it blank. I write a "zero," " Young said.

Young combines the receipts for all his properties in the two monthly envelopes. However, this often poses a problem at tax time, as the Schedule E dictates each income and expense be allocated to an individual property. "Every independent rental owner knows that's not the way it works in real life," Young said. "For example, if you buy a roll of stamps to do some marketing mailings, what property does that go under?"

Tony Hemminger, Sole Proprietor of Denver-based Hemminger Properties, has added some computing power to his pen-and-paper method. Hemminger uses a system of Excel spreadsheets to track finances--one for income, one for expenses and one to reconcile the two against his budget.

Beginning with one townhome in 1986, Hemminger's system has evolved as his rental investments grew to six buildings with 63 units.

"I'm pretty well organized with my paperwork," Hemminger said. "At the end of the year, I just sit down and go through my invoices and divide them up among my properties. I always double-check to make sure I did not miss anything."

However, while his accounting method is accurate, Hemminger said he feels perhaps his system is too time consuming. Hemminger said it takes him a total of 14 to 16 hours over the course of several weekends at the end of the year to compile his tax information.

"It is a comfortable system, although it is probably more cumbersome than what I really need," he said. "But I'm used to it. It's like an old friend. It has evolved with me over the years, and it is beneficial in that I don't have to learn a new system. However, I could probably spend that time more effectively if I were able to be out working on my properties."

Stopgap Software Solutions

To save time and prevent calculation errors, some independent rental owners are turning to software to help them track income and expenses. However, many employ software not specifically designed for property management and modify it to suit their needs.

Like Hemminger's use of Microsoft Excel, Werner has adapted Intuit's Quick-Books Pro to help him manage his three properties and almost 100 units. Using the small business accounting software, Werner sets up each resident as a "customer" and each property as its own "company," based on QuickBooks' standard fields.

Werner said the most advantageous feature of a more sophisticated program like QuickBooks Pro, which costs about $300, is the software's ability to remember and repeat previous information. For example, his software will automatically fill in recurring fields, such as the amount of rent a resident pays each month, thus reducing data-entry errors.

"I advise people to use some sort of software program because once the program is set up, you are able to use the repeat functions," Werner said. "Once you get things working smoothly, it is straightforward and convenient. Any system in which you can repeat with reliability is a good one."

Werner uses his software to track more than just the basic information he needs to file Schedule E. For example, while the IRS form requires owners to enter the amount spent on utilities, Werner divides that category into gas, electric and water for his own tracking purposes.

"Keeping good records is part good business, part for the government and part for accurately representing your property when you go to sell it," Werner said. "You develop the discipline as a good businessperson to keep on top of things. It is just an expanded version of what you do with your own finances."

Werner's software, however, cannot do everything he'd like, as it was not designed with rental property owners in mind. "What is missing is the tracking ability and the ability to manage the individual residents," he said. "Right out of the box, it is not very user-friendly for rental owners."

Tailor-Made Programs

While independent rental owners often hear about the more complex and expensive property management software, many of these same companies also provide more economical software solutions designed with the small owner in mind. (See chart, page 30.) For B.J. Cowan, Broker/Owner of One-By-One Realty, Denver, finding property management software to fit the needs of the two properties he owns and six others he manages was a relief.

"I used to use pen and paper --"the good ol' system"--but it was time consuming," Cowan said. "I thought there were probably software programs out there, but I did not know where to look."

Cowan was asked to test a new software program designed for owners with 10 properties or fewer and was pleased with the results. "When I did the beta testing of my current software, I immediately saw the advantages of it, and the pen and paper went in the trash. I feel like I'd been living in the dark ages and my prayers had been answered."

Like Werner, Cowan found the software's ability to repeat information helpful.

"Once the fields are set up, the software basically does everything by itself," Cowan said. "It remembers and anticipates what you have done and what you'll want to do. It already knows from your initial input, and the information conveniently is right there when you need it."

That ability to repeat has reduced the time Cowan spends entering records. "I don't make the errors I used to by copying data over by hand," he said. "The calculations are fast and accurate--I used to spend about one hour a month on bookkeeping and now I spend about 10 minutes. It is as fast as I can move my mouse."

Because his software is designed specifically for rental owners, Cowan said he has easy and immediate access to property management data. "When I want to pull a report, I just push a button and it's there," he said. "And I can see my current cash flow immediately on the bottom of the screen each time I update information."

The software he uses, which costs about $99, also has a function that fills in Schedule E.

George Kaplan, Owner of Hilltop Realty, Lexington, Mass., also uses property management software designed for independent rental owners. While larger companies can also employ this software, Kaplan uses a version scaled down for owners with one to 25 units, starting around $300.

"The biggest feature for me is that I can enter all the residents' monthly [transactions] with just a few keystrokes," Kaplan said. "I can then easily track who owes me rent."

The program's ability to help him manage his 16 units--combined with its accounting features--makes the software worthwhile for Kaplan. "I feel that the monthly income and expense reports, the ability to compare expenses from one year to the next and the resident transaction features make this software a good investment," Kaplan said. "Similar to other money management programs, my software generates reports based on checks written through the system."

However, Kaplan said, while upgrades to the program have improved the software, he wishes he was able to customize it further to suit his needs. "If it was a little more flexible, I would need less time to review individual property expenses to make sure I haven't missed any expenses or categorized them incorrectly," Kaplan said. "Overall, I would give a qualified "yes" to a recommendation [of property management software]--the qualification being that you give up some flexibility to do things your way in order to use the program."

To Buy or Not to Buy

According to Hemminger, the decision to invest in a property management software solution depends on finding one that fits his needs better than his current pen-and-paper method.

"I would consider a software program if there was one that was tailored to fit my needs," Hemminger said. "I'm not very computer savvy--middle of the road at best--and sometimes it is hard to tell without a demonstration which will suit me."

The decision also depends on the return on investment in time and money. "For a small guy like me, some of the more complex systems are cost prohibitive, but I'd be willing to spend the money on software that I thought would work well with my needs," Hemminger said.

Werner noted that while advanced tracking software could be helpful for many independent rental owners, it is not as pressing a need as it is for REITs and other large apartment management companies.

"While it is imperative for larger companies to have detailed tracking information, I just look at that data on the fly to check things like my economic data, vacancy and turnover rate. For example, if you manage 14 units, you don't need a report telling you that one is vacant."

Young said, "These programs are an absolute necessity for larger companies--you can't run [a large company] with a legal pad and pencil. But for me, there aren't that many expenses to track. There are hours you are going to have to invest in this process regardless of whether you use software or not."

And regardless of the system an independent rental owner uses--be it pen and paper or software--Hemminger stressed that good organization is the key to success. "At the end of the year when I go to do my taxes, I know exactly where I need to look," he said. "My system might not work for everyone, but it works well for me."

Jeanine Gajewski is NAA's Manager of Communications. She can be reached at jeanine@naahq.org.

Alternative Minimum Tax and the Independent Rental Owner

The alternative minimum tax (AMT) is an alternative income tax that was established in 1969 to prevent wealthy individuals from circumventing basic income taxes through various exemptions. However, because Congress has not adjusted the minimum income for the AMT, more middle class and small business owners have fallen subject to the tax. Independent rental owners should be aware of the qualifications and rules that apply to the AMT, particularly as they apply to deductions and exemption status. For information, please see www.irs.gov.

NSC Members Who Provide Property Management Software

Product for Independent NSC Member Phone Web site Rental Owners Estimated Cost Other Information

American Computer Software 800/527-9449 www.acsoftware.com Management Plus Call for information Integrates with QuickBooks

AMSI, a Geac Company 800/851-1115 www.amsi.geac.com Call for information Call for information Call for information

Intuit 800/321-8770 www.realestate.intuit.com; Quicken Rental $99 Designed for owners with 10 or fewer properties; www.intuit.com Property Manager Intuit also makes QuickBooks

Koriel REP Inc. 888/456-7435 www.koriel.com Call for information Call for information Call for information

London Computer Systems 800/669-0871 www.rentmanager.com Rent Manager 10-unit package Call for information Small Business Edition starts at $150

Property Automation Software Corporation 800/964-2792 www.tenantpro.com Tenant Pro 25-unit package Call for information starts at $300

Property Solutions International 801/318-6384 www.propertysolutions.com Resident Works $495 for 1-25 units; Web-based; $39 per month Integrates with QuickBooks

Realum Inc. 240/715-1216 www.realeum.com Call for information Call for information Call for information

RealPage Inc. 87-REALPAGE www.realpage.com OneSite Call for information Call for information

Remanage Inc. 877/362-6243 www.remanage.com Remanage Express Call for information Designed for owners with 250 units or fewer

Yardi 805/966-3373 www.yardi.com Call for information Call for information Call for information

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