Financial Clarity for Los Angeles Landlords: The Power of Income and Expense Reports - Article Banner

Managing the financial records and accounting for your Los Angeles rental property can be more complicated than you expect. We have talked to landlords who weren’t sure how much money was coming in or what they were spending on maintenance, vacancy, and marketing. 

The numbers matter when we’re talking about real estate investments. Even if you’re only renting out one property, you want to know what you’re earning and spending. You need to be organized for tax time. 

Financial clarity will make you a better landlord and a more successful real estate investor. 

Let’s talk about the power of income and expense reports, and why you need them in your life. 

What’s an Income and Expense Report?

Income and expense reports are financial statements that show your rental property’s income and expenses over a specific period, typically monthly, quarterly or annually. These reports provide a snapshot of your property’s financial health and profitability and help you make informed decisions about improvements, maintenance, and rent increases.

A real estate income statement is one of the most important reports for real estate investors. 

If your investment property is under-performing or over-performing, a rental property income statement is a good way to begin your analysis of why. You’ll also find that by reviewing your income and expense report, you can see your net operating income (NOI), which is a critical data point used in understanding some essential financial metrics for your property, such as cap rate and debt service coverage ratio (DSCR).

Information on a most income and expense reports will include:

  • Gross rental income earned over a specific period of time.
  • Additional income that your property brings in, like pet rent, late fees, or valet trash charges.
  • Operating expenses, which might include property management fees, pest control payments, and landscaping bills.
  • Insurance premiums. 
  • Local property tax payments.
  • Mortgage interest.
  • Net operating income (NOI). 

You can create a monthly, quarterly, or annual income and expense statement. 

By running this report monthly, you can analyze your rental property performance on a month-to-month basis, which will give you an intensive look at how things are going almost in real time. A month-to-month report will allow you to immediately notice any unexpected costs, and closely monitor cash flow on an ongoing basis to identify income and expense trends over a longer time period.

You might do an annual income and expense report as well. This will enable you to see your year-end profits and losses, which highlight total income, current accrued expenses, and total net operating income from the beginning of the tax or calendar year to the date the report was run. We like an annual income and expense report because it helps to analyze an investment’s overall performance and to give you an indicator of current taxable income. You can also make some predictions about the future. 

What Does the IRS Say About Income and Expense Reporting?

One of the most important reasons that landlords in Los Angeles should have an income and expense report handy is that the Internal Revenue Service (IRS) requires that you report both your income and your expenses as a rental property owner. Why make tax time any more unpleasant than it has to be?

If you visit irs.gov (and you should; there’s a lot of great information on there that’s actually easy to digest), you’ll find that they dedicate an entire topic to income and expenses for rental properties. It’s called Topic 414, and here’s a summary of what it includes:

According to the IRS, cash or the fair market value of property or services you receive for the use of real estate or personal property is taxable rental income for anyone who collects such income. In general, the IRS also allows you to deduct certain expenses that come with renting property from your rental income.

 

  • Instructions 

Here’s how the IRS would like you to report your income and expenses. Most landlords will generally use Schedule E (Form 1040), Supplemental Income and Loss to report income and expenses related to real estate rentals. However, if you provide substantial services that are primarily for your tenant’s convenience, report your income and expenses on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship).

 

  • What to Include When Reporting Income 

The IRS expects most individuals renting out property to operate on a cash basis, which means rental income is counted when it’s received and expenses are counted when they’re paid. For tax purposes, rental income includes: 

  • Amounts paid to cancel a lease. 
  • Advance rent that may be paid, regardless of the period that’s covered. It should be declared as income in the year that it’s received. 
  • Expenses covered by a tenant. If your tenant pays HOA fees, for example, that’s income.
  • Security deposits, unless you’re required to return the deposit at the end of the lease (which you probably are). An example of how this would be required income is if a tenant breaks a lease agreement. You’ll keep the security deposit, and that’s considered income. 

  • What are Expenses Allowed by the IRS?

Examples of expenses that you may deduct from your total rental income include depreciation. This is an allowance for wear and tear and general deterioration that occurs at a property. The IRS expects you to begin to depreciate your rental property once you start renting it out. Use Form 4562, Depreciation and Amortization to report depreciation. 

You can also deduct repair costs as expenses. You cannot include improvements that add value to the property, but you can deduct routine maintenance expenses. 

Operating expenses such as fees charged by service providers (landscapers, property managers, etc.) are also tax deductible as expenses. 

 

Income and Expense Reports Benefit Los Angeles Landlords

Keeping accurate and up-to-date income and expense reports provides numerous benefits to landlords in California. Here’s how: 

  • These reports are legally required by the state and the federal government. Failure to maintain them could lead to penalties or fines. Make sure you’re documenting everything you earn and spend so you don’t find yourself making expensive and needless legal mistakes. 
  • Income and expense reports can help you avoid accounting errors. The purpose of financial reporting is to be accurate, detailed, and transparent. When you’re tracking every dollar that comes in and goes out, there’s less of a chance that you’ll be the victim of accounting errors and fraud. You’ll have everything documented and watched. 
  • You can use these reports to analyze rental revenue and expenses trends over time, which can help you plan for future improvements and capital expenditures. 

These reports can also help you make decisions about your investment portfolio as a whole. If there’s a property that’s costing you more in maintenance every year, and there’s no way to increase its value no matter how many improvements and upgrades you make, it might be time to sell. If you notice that all of your income is coming only from single-family rental homes and that market is beginning to soften, you might decide to diversify into multi-family buildings. 

Income and expense reports can be customized to show you exactly the kind of information you need to make better and smarter decisions. 

How to Create Your Own Income and Expense Report 

Create ReportCreating accurate and comprehensive income and expense reports requires time and attention to detail. But, there’s no single formula, so you should feel empowered to create whatever type of report will work best for you. 

To get started, you’ll need to maintain accurate records of your rental property’s income and expenses. The easiest way to do this is by using software or a spreadsheet to keep track of your expenses by date, description, and amount. Keep your receipts, invoices, and bank statements organized and easily accessible so that you can reconcile your income and expenses regularly.

While spreadsheets can work wonders, it may be worth your resources to invest in some good technology. One of the most effective ways to keep accurate records and create comprehensive income and expense reports is using specialized software. There are many options available online, and some popular choices for independent landlords include QuickBooks, Buildium, and Appfolio. These programs help landlords to record and track their rental property’s income and expenses, generate reports, and provide access to tax tools and planning features.

If you’re unsure about your ability to effectively track your income and expenses, talk to a Los Angeles property management company. This is one of the most important functions we provide for our owners. By keeping good records, we can make sure you have a more successful and profitable investment experience. When you partner with us, you can leverage the technology and the systems we already have in place. Rent is collected online, maintenance invoices are tracked and paid, and you have access to everything. 

Contact us at El Camino Property Management. We’ll make your bookkeeping and accounting easy, and we’ll ensure that you have ongoing access to all of your income and expense information.

Skip to content