Becoming a landlord offers distinct financial benefits, but it also requires obtaining and keeping documentation pertaining to the tenants, the lease, the property, rental income and related costs. To protect your financial interest in the property, and to deduct expenses against the rental income, you must keep detailed records. Saving rental records by year in a large accordion file will keep them organized and easy to locate when you need them.
Save tenant applications and supporting documents. Fair housing laws prevent discrimination based on race and other factors, so it’s in your best interest to keep a file of tenant applications, background checks, reference checks and copies of credit documents that you use in choosing a tenant. Obtain a signed tenant consent form before doing a background check. Save evaluation records for at least two years for tenants you did not approve and keep an ongoing file for the current tenant.
Lease Agreement and Supporting Records
In today’s litigious society, you need more than a verbal agreement and a handshake to protect your interests when renting your house – you need a comprehensive lease agreement. Keep a signed copy of the agreement as well as a signed copy of your rental rules. Rental rules pertain to specific tenant behaviors, such as occupancy limits, pet policies, rent due policies, parking permissions and noise restrictions. Keep a signed copy of the security deposit form as well.
Often, the lease agreement won’t cover all the aspects of the property that you should disclose before renting. Because the landlord/tenant laws in your state might vary, it’s in your interest to contact an attorney to make sure that you use the correct disclosure forms. Typically, these include a lead-based paint disclosure, radon gas disclosure and notice of any other factors that could potentially affect the tenant’s enjoyment of the property. Keep signed copies of these forms to protect you from future claims and accusations.
Complete a move-in, or a rental inspection, report just prior to the tenant moving into the house. The form, which lists the condition of the house in detail, should be dated and signed by both you and the tenant. When the tenant vacates the property, complete another inspection form to determine if any damages have occurred that might require withholding a portion of the tenant’s security deposit. Take photographs or videos of the move-in and the move-out condition of the property. Other property records to save include documentation of repairs to the house, as well as any applicable warranties for repairs and services. Keep property insurance policy records in a safe place.
The IRS requires documentation of every expense you deduct on your income taxes. Although it isn’t required, a designated checking account used exclusively for rental income and expenses helps with financial record keeping. Keep bank statements that show rental income deposits. Ask the bank to include photocopies of your canceled checks. Keep credit card statements, utility bills, property tax statements and records of the amount of interest you paid if you have a mortgage on the house. Keep a mileage log when you travel to the house to show it to prospective tenants or to address concerns or inspect the property. Save receipts of all costs incurred through advertising the property, legal fees and fees paid to a real estate agent or rental manager.
Keep an expense journal to document your expenses on the rented house. You can use a multicolumn ledger book and separate your expenses into categories, such as “repairs,” “utilities” and “taxes.” An even easier way to document expense records is to use small business accounting software that allows you to post income and expenses. The software tallies up the expense in each category, saving you time when preparing your tax records.