Reconciling Rents, Security Deposits and Loan Payments for Landlords

What landlord books need to track

A rental property is not one number. It is the rent that came in, the security deposit you hold, the mortgage payment that went out, the repair you paid for, and the tax bill you owe. Each one needs its own line so the profit per property is real.

When you track all of it by property, you can see which units pay and which ones cost more than they bring in. When you do not, you get one big pile of rent and one big pile of costs and no way to tell whether the duplex or the single family house was the good buy.

Most landlords run more than one property at once. Some units rent fast and stay full. Some units sit empty between tenants. Some units need a new roof. Some units only need a paint touch up. Each unit has its own rent, its own costs and its own loan. When the books tie each line to the property, the business makes sense. You can read more about how we keep these lines tied on our bookkeeping page.

Here is what a clean property looks like.

When each line ties to the property, the profit per unit is real. When they sit in one pile, you are guessing.

How rent shows up in your books

Rent is the income that pays for everything else. It comes in on the first of the month, or it comes in late, or it does not come in at all. Each one needs a line.

The clean way is to set up a tenant in QuickBooks Online for each lease and send a recurring invoice for the rent. When the tenant pays, the payment ties to the invoice and the income lands on the right property line. You can see which tenants paid on time and which ones are late. You can see which units sit empty and which ones are full.

The messy way is to book every rent check to one general rent line with no property tag. Now every unit looks the same. You can not tell if the duplex covers its costs or if the single family house is the one losing money each month. You can read more about how we keep rent tied to property on our bookkeeping page.

Here is how to keep rent clean.

• **Send a recurring invoice for each lease: ** so the rent goes out on the right day.
• - **Match each payment to the invoice it pays: ** so the income ties to the tenant and the unit.
• - **Tag each invoice to the property: ** so rent sorts by unit.
• - **Watch for late pays: ** a tenant who pays late every month is worth a closer look.
• - **Track empty units: ** a vacant unit earns nothing and still costs money.

When the rent ties to the property, the real income shows. When it sits in one pile, every unit looks the same.

How security deposits show up in your books

A security deposit is not your money. You hold it for the tenant. When they move out, you return it, or you keep part of it for repairs. This is the line most landlords get wrong.

The clean way is to book the deposit to a liability account, not to income. The money sits in your bank, but your books show it as money you owe the tenant. When the tenant moves out and you return the full deposit, you move the money out of the liability and out of the bank. When you keep part of it for a repair, you move that part into income and the repair cost lands on the property line. The liability account goes back to zero.

The messy way is to book the deposit as income the day it comes in. Now your rent looks higher than it is, and your profit looks bigger than it is. When the tenant moves out and you return the money, you have no liability to draw from, so the return looks like a sudden cost. You can not tell what you earned and what you only held.

Here is how to keep deposits clean.

• **Book each deposit to a liability account: ** not to income.
• - **Keep one deposit line per tenant: ** so you know whose money you hold.
• - **Return the deposit from the liability account: ** so the books show the give back.
• - **Keep part of a deposit for repairs: ** move that part into income and book the repair on the property.
• - **Check the liability total each month: ** it should match the money you hold.

When the deposit sits in a liability account, your profit is real. When it sits in income, your profit is a lie you find out about at tax time.

How loan payments show up in your books

A loan payment is two things in one check. Part of it pays down what you owe. Part of it is interest, which is the cost of borrowing. The two need their own lines.

The clean way is to split each loan payment in your books. The principal part reduces the loan balance on your balance sheet. The interest part goes to an interest expense line. When you do this every month, your balance sheet shows the real amount you still owe the bank, and your profit and loss shows the real cost of the loan.

The messy way is to book the whole payment to one line. Now your loan balance never goes down in the books, even though it goes down at the bank. Your balance sheet is wrong. Your interest cost is wrong. When you sell the property or refinance the loan, the books do not match the bank and the cleanup takes days. You can read more about how we tie loans to the books in our job costing for painters and flooring guide. The same split works for a rental loan.

Here is how to keep loan payments clean.

• **Split each payment into principal and interest: ** do not book it to one line.
• - **Reduce the loan balance by the principal: ** so the balance sheet stays right.
• - **Book the interest to an expense line: ** so the cost of the loan shows.
• - **Match the loan balance to the bank statement each month: ** the two should agree.
• - **Track each loan by property: ** so you know which unit still owes what.

When the split runs every month, the balance sheet stays true. When it does not, the loan balance drifts and the cleanup piles up.

How to keep each property on its own line

A landlord with three units and one checking account needs a way to sort the money by property. Classes in QuickBooks Online do this.

The clean way is to turn on class tracking and set up one class for each property. Every rent invoice, every repair bill, every loan payment and every tax bill carries the class for the property it belongs to. When you run the profit and loss by class, each property shows in its own column. You can see which unit pays and which one eats cash.

The messy way is to skip classes and book everything to the same lines. Now you can not sort by property. You can not tell if the duplex earned its keep or if the single family house is the one that needs a rent increase.

Here is how to keep properties apart.

• **Turn on class tracking in QuickBooks Online: ** and set one class per property.
• - **Tag every invoice to its property class: ** so rent sorts by unit.
• - **Tag every bill to its property class: ** so costs sort by unit.
• - **Tag every loan payment to its property class: ** so debt sorts by unit.
• - **Run the profit and loss by class each month: ** so each property shows in its own column.

When each line carries a class, the business reads like a row of properties. When it does not, the business reads like one big blur.

How the month end close works

At month end, every property needs its lines added up. The rent, the deposit changes, the loan split and the repairs all pull together into one property total. When the properties roll up by class, you see each unit side by side.

We start with the bank. We match each rent payment to the deposit that landed. We match each loan payment to the check that went out. We split the loan payment into principal and interest. We check the security deposit liability against the money you hold. We tie each repair bill to the property it fixed. Then we add up the month by property. We send you the profit and loss by class, a balance sheet, and a cash summary. Each property sits inside the report.

Here is a simple month end check.

• **Match each rent payment to the bank: ** every deposit cleared.
• - **Match each loan payment to the bank: ** and split it into principal and interest.
• - **Check the security deposit liability: ** it should match the money you hold.
• - **Confirm each line carries a property class: ** so the report sorts by unit.
• - **Run the profit and loss by class: ** so each property shows in its own column.

When the close runs every month, the business stays clear. When it skips a month, the units stack up and the next month is harder to close.

A situation we clean up

The deposits that sat in income

A landlord holds three units and one checking account. Every rent check lands in one general rent line. Every security deposit lands in income too. The loan payment goes out as one big number with no split. At year end, the owner looks at the profit and loss and sees rent looks high. The profit looks too good. The balance sheet shows the loan balance the same as the day the property was bought.

Here is how we handle it. We go back through the open months and move each security deposit out of income and into a liability account. We split each loan payment into principal and interest and fix the loan balance on the balance sheet. We set up one class for each property and tag every invoice, bill and loan payment to its unit. When we are done, the owner can run the profit and loss by class and see each property in its own column. We set up a rule so the next rent check carries the right class from the start.

Mistakes we fix

• Every security deposit booked as income instead of a liability
• Every loan payment booked to one line with no principal and interest split
• The loan balance on the books that never matches the bank
• Every rent payment booked to one general line with no property class
• No class tracking turned on, so no way to sort by property
• A deposit kept for a repair that never moved into income or onto the property line
• The security deposit liability total that does not match the money held
• No profit and loss by class run at month end
• An empty unit that earned nothing but still costs money, and no one saw it

Common questions

How do I book a security deposit? Book it to a liability account, not to income. The money sits in your bank but your books show it as money you owe the tenant. When the tenant moves out, return it from the liability account. If you keep part for a repair, move that part into income and book the repair on the property.

How do I split a loan payment? Split each payment into two lines. The principal part reduces the loan balance on your balance sheet. The interest part goes to an interest expense line. Match the loan balance to the bank statement each month so the two agree.

How do I keep each property on its own line? Turn on class tracking in QuickBooks Online and set up one class for each property. Tag every rent invoice, repair bill and loan payment to its property class. Run the profit and loss by class each month so each unit shows in its own column.

How do I match rent to the bank? Send a recurring invoice for each lease. When the tenant pays, match the payment to the invoice. The income ties to the tenant and the property. A rent check with no invoice is an orphan deposit that hides which unit paid.