Behind the Numbers: How I track my rental property finances

(00:00)
In this episode, I’m going behind the scenes to share how I do bookkeeping as a rental investor. This is the most important part of rental investing that no one is talking about. But if you get it wrong, it could get you into trouble with your taxes and with your overall business. This is something you need to get right if you invest in rentals, and I’m going to show you how. Welcome to the podcast, Real Estate Investing with Coach Carson. I’m your host, Chad Carson. You can also call me Coach Carson. This is a show to help you get out of the financial grind so you can spend your time doing more of what matters. This episode was actually originally recorded on my friend Michael Zuber’s channel, One Rental at a Time. So thank you to him for letting me share it with you. Let’s get started.

(00:44)
Because having good numbers, I compare this to everybody’s heard of or seen the movie The Matrix, where Keanu Reeves is a cool guy who’s dodging bullets and everything. But the coolest thing is he sees the entire world in numbers and it slows The whole world slows down for him. That’s what I look at when you understand the financials of your business. Literally, you can see your entire business at numbers. That’s the way the pros do it, the corporate people, but also the small, mighty investors. They see when there’s good when there’s bad things happening, they see when there’s bad things happening, and then those numbers can tell you when to jump in and solve something, fix something. They can tell you when to do something better. I want to unpack, and I want to hear from you because I know you’re a pro and you’re doing this, too. I like to compare notes I want to share with people just a higher level of what my financials look like, how I track them, why I do it, how I do it, and then in the future, unpack it even more.

(01:39)
When I think about this, when you’re just a W2 employee, your taxes are easy. There’s a lot You can almost do it yourself, which I wouldn’t do that, get an accountant behind you. But anyways. But once you start running a business, which being a landlord is, the numbers, it’s all about the numbers. And by the way, you got to be able to them because you’re reporting to the IRS. But really, when you get the numbers right in my mind, not knowing where this conversation is going, is I can go back to day one of my books and look at how different buildings are performed. Usually, I’m buying junk, so the first year is heavy capital investments. Then after year two, year three, year four, and I could start to see issues or challenges. One thing Olivia and I have done over the last, I want to call it two years, is we’ve taken the worst performing property. Again, it’s not worst performing of the year, but of the last, probably the last five years, and we’ve sold it. And what we’ve seen, just by getting rid of the worst one, which for us was on Glenn, it was a triplex on Glenn, we sold the building.

(02:44)
Our cash flow went up. There you go. Kind of a problem property, I would think, right? Yeah. Then just last year, we sold a property we called Tenth. And we’re doing our numbers now because we’re recording this in February. Our appointments early March. So I have a feeling the same thing will happen. So when you look at these, I think you break them down into three buckets. How do you see the world?

(03:08)
Yeah, the first one is the one everybody thinks of and talks of, and that’s all they focus on, is doing your taxes. It’s important. There’s no doubt about it. You have to do it. There’s only two guarantees in life, death and taxes. We’ve heard that one. So you have to do this. And so when you track your numbers for your properties, you’re basically putting a historical record of the income and the outflow from your business, the income, the expenses, the purchases you make. And you have to report this to the IRS. So there’s two categories of things you need to be thinking of in that first bucket of tax data is number one, you need to just track it somehow. And I do this in a couple of different ways. I now use QuickBooks to track all my business. That’s a software. There’s other software.

(03:50)
Let me ask you about that. I’m guessing by property or by address, I’m guessing?

(03:58)
Yeah, the good thing about QuickBooks is really versatile. You can track every income and expense. There’s a category for every one of those. But then there’s also something called classifications. Every property, you can assign a class and just describe it. 123 Main Street, 123 Maple Street. Basically, you can do a report that says all the income and all the expenses for your entire business, or you can do another report that says, give me a breakdown just for this one class, just for this one property. That’s where it gets really useful. Every time you enter a check, every time you pay a bill, every time you make a deposit, you can have a little button that you click, make sure I have to put a class on there, or otherwise it won’t even let you close the window. I like it.

(04:36)
You got to associate this with something. Yes.

(04:42)
There’s a lot of… That’s the nitty-gritty work of putting in your books. I’ve hired bookkeepers in the past. Right now, I don’t have a bookkeeper. So my 2024 to-do list is to get a bookkeeper. I’ve been doing this myself for the last couple of years. Even when I was in Spain, that was the two hours a week that I worked was doing bookkeeping. But the point is, to have good books, you need to accurately track what happened, the income and expenses. But then also, you have to have, in case you get audited, you need to have proof of those expenses.

(05:12)
Oh, yeah. Having gone through an exhaustive audit that took 13 months, you are absolutely right. If you can’t give proof or whatever, I figured they had a word for it, but I’ll just call it evidence. If you don’t have evidence of it, that’s coming out. So have evidence.

(05:29)
Yeah, that 5,000 $1,000 expense that you thought you had, then you forgot the receipt.

(05:33)
They’re going to say, Well, got to go.

(05:35)
Where to go? So now you have to- It’s on you at that point.taxis on that $5,000. If you made a profit three years later and you have to pay taxes on it. So The point is, that’s just a discipline. This is like getting your teeth clean, going to the doctor to annual physical. Nobody’s like, I love doing that, but you got to do this stuff for your taxes because it’s part of life.

(05:57)
Again, this is probably because I was an accountant out of school, so I was in the debits and credits, and I did general ledger accounting and all of that. I always looked at my… I actually told by a CPA this. I said, I feel like I’m going to my dad to show him my report card. I look at the tax share. It’s my report card. How do we do? The only way to really know how you do is to take care of it every day. You don’t want to go to your tax guy with a box of receipts saying, Figure it out, because that’s That’s not a good idea. You got to have the discipline weekly, monthly at the latest. To me, it was always, Hey, dad, here are my grades. How’d we do?

(06:39)
There’s also a lot of sloppy investors who just think, Well, I’m just going to have this vague thing If I don’t know what’s going on, then neither will the IRS, and wrong. That’s the other thing. But the other problem, if you have good books, your CPA could help you as an advisor and say, Hey, there’s a legitimate legal way to save taxes here. There’s this new tax law, there’s this new where you can deduct more things in one year. Having good books gives ammunition to your tax advisor to then save you money. You can pay for the CPA’s bill every single year if you have some good tax planning. That’s what having good books allows you to do. There’s a selfish reason. It’s not just the report card metaphor, but it also can make you money by being a smart tax investor.

(07:23)
No, I totally agree. Like you said in the opening, that’s the one that everybody thinks about, which means the next two probably get ignored. Where do you go next?

(07:31)
Yeah, these are more important. The taxes are just what you have to do. They’re like going to the doctor. You have to do it.

(07:36)
Oh, my goodness. All right, let’s go.

(07:37)
The second one is they’re called KPIs, and you’ve been in the business world.

(07:42)
You know this one?

(07:43)
Kpis are your key performance indicators. Every business worth their salt has these. But for me, what this looks like, this is an ongoing process for me. I started it a couple of years ago. I actually do it in my Coach Carson business more regularly than I do my real estate business. But this is You are every single month, you pick just five, six, maybe most 10 stats in your business that are the most important stats. Think of this like the pulse. If you are a doctor or a nurse, you’re going to take your pulse on your patient, the vitals on your patient. These are the the idles of your business, that if you track them consistently and in real-time, that’s the key, then you can tell the health of your business. For me, that’s just critical. I look at the amount of money coming in, so the gross income, the total rental income for my business for the month. And I have a number. I said, This is what I should be getting coming in total, not by property. This is the total money I should be collecting on a monthly basis. And this is the standard.

(08:39)
If I’m below that, what’s wrong? What happened? If it’s above that, okay, that’s good. Most of the time, 99% of the time, it’s just like, Oh, normal month, good. Let’s keep moving. But every once in a while, there’s like, Why am I 20% less on my gross income than I’m supposed to be? Now I’m looking at the report. Then I’m digging into the reports that the property manager gave me. Then I ask questions. Then I might realize, Oh, we got five properties that are vacant, and why are they vacant? And how long have they been vacant? And so this is the matrix. This is the matrix stuff. If you see the world in numbers, that one number in five seconds can say, alert, alert, you got What’s going on in your business? Dig a little deeper. And I do that both with the income. I do it with the expenses, I do it with the cash flow. Those are my big three. Let’s poke at that a little bit because there’s so many things that you bring to the table that could go deeper.

(09:31)
Let’s talk about that. You said revenue or income, expenses, cash flow. That third one is actually the most… It’s like oxygen. People don’t realize that you could go broke with high income and low expenses, in theory, if you have a mismatch between when cash shows up and when cash goes out. Cash flow, how do you watch? Let’s talk about that third one because cash flow is everything, but almost nobody… I could ask most people, How much do you make? 90% of people can give me a number. If I tell people, How much do you spend? Probably half people could give me a rough estimate. No one, probably other than you, could tell me what your cash flow is. So let’s talk about that.

(10:18)
Here’s the big idea to remember. Category number one, taxes. It might say that you made a profit. It told you you made a profit of $100,000 last year. But You could have a zero cash flow and have $100,000 profit. Let’s tell people how that works. Absolutely. How is that possible? How is it possible you made $100,000? Let me tell you how. Number one, every time you pay principal on your loan, let’s say you pay $500 in principal one month, that is technically profit. It wasn’t an expense. You paid on principal. But guess what? Who got that cash flow? Did you get it? Or did the bank get that cash flow?

(10:58)
It’s a negative on yours. You’re You’re down 500.

(11:00)
You’re down 500 bucks. So let’s multiply that times 10 if you have 10 properties, 10 times 500. You just made 5,000 bucks this month, and you made 60,000 bucks for the year, and you might have been negative on your cash flow.

(11:15)
Yeah, that 60 grand is a negative. It’s a forced savings. It’s a this, it’s a that, whatever you want to call it. But on your taxes, it looks all good. But no, this is why cash flow is the one.

(11:29)
Cash flow is The reason I started doing this, Michael, was back in 2016, ’15, I was still recovering from the great recession. Actually, I track this cash flow. I say that I just did this the last couple of years. I’ve been tracking cash flow for years and watching my bank account, mainly because-The necessity. I survived. I said, Crap, I’m not going to survive for the next year in my business. I better watch this. That’s the important part.

(11:49)
A lot of people are income and expenses. It’s the cash flow, folks. There’s a balance sheet, there’s an income statement, and then there’s the third, and never talked about, but The most important, cash flow statement. The game, cash flow, right over here, just a coincidence. I love it. It’s about cash flow.

(12:07)
It is. If you want to survive in your business. So I track it every month. I know. And so first of us, survival. But then once I moved into the harvester phase, like I talk about the third phase, where you actually want to live off your income. Everybody talks about building wealth with real estate. I know very few people, you’re one of them, I’m one of them, who actually live off their income and say, Hey, this is something I can just live off of. And the way I do that, the number one The thing is watching my cash flow. And I watched it for years and said, Okay, I finally feel confident. My business partner and I, we didn’t pay ourselves a lot of cash flow. We paid ourselves a $3,000 dividend for a long time, even when we’re making a lot more money than that, because I wasn’t confident that the business could distribute that money until I tracked that cash flow for a long period of time and said, Okay, even on the downs, even when we’re at our low point of our cash flow, because it goes up and down, we could still raise our dividend, the equivalent of a dividend, and pay ourselves more money.

(13:00)
And so that was 2017. I took a deep breath. I started paying myself more money, and I moved to Ecuador for a year knowing that I could actually survive off of it.

(13:09)
That’s amazing. I love that. What do you got for it? You did number two. It was awesome. What’s number three?

(13:21)
Number three is, you talked about it a little bit earlier, is the strategic chess match of rental properties. Yes, I love that. Is understanding your You go back in time and you say, Here’s a historical record of this one property. I think what you know, I’ve coached a lot of people over the years. So many people think, they say, I made a lot of money on this property. I did really well on this property. And then I I get into the books with them and I say, No, you didn’t. You didn’t make money on that property. Show me. This is the truth. We have to look at the historical record of our property to really understand if it did well, if it didn’t do well. For us to be to make strategic decisions with each property. Each property is like a chess piece. And so you said earlier you had that triplex that was not a good performer. This is what I do. I make a spreadsheet of all my properties over time using the quitbooks data, and I will rank them and I’ll say, These are the ones doing really well. These are the ones I like.

(14:17)
Exactly.

(14:18)
So far, we do this. I love this.

(14:22)
The ones I wanted to… I call it pruning, or I used to call it like a calling the herd. I had a list of properties at the bottom. I got to call these properties.

(14:32)
You know how you keep a healthy tree? You trim it. Just for example, one of the things… This was probably five or six years ago, but one of our properties, we saw the water bill go up. Started gradually going up. Then over a couple of months, there were some big spikes. There was a significant water leak that was not reported. That’s just one example by watching that. If we were just looking at the cash flow, we wouldn’t have noticed because rents went up and would have hidden that. But one of the things that I do in this strategic chess match, I will take all expenses on a property that have more than three years of history, and I will chart it out. When you chart it out, the lines all look the same. But if there’s one spike, it’s like, Oh, I better look at that thing. What was that?

(15:23)
Graphs are so helpful. I’m a visual learner. When I see that red line, the spike, it go up. That gap is what’s important. That’s That’s the cash flow gap. That’s the gap between your expenses. If the rent goes up, it bails you out. But maybe your property taxes have doubled in three years and your town is going broke. You need to know these things.

(15:41)
Then you could do couple expenditures. Again, one of the things going back to number one, working with your accountant, especially if you’re a W2 employee, you can’t carry forward your loss if you make over whatever that number is, 250 or whatever the number is. Sometimes you’re going to do it as a capital expense, so you stretch it out. Sometimes you’ll have the option to make it an expense in the time. Again, talk with a CPA. But these are all the chess matches. And again, not enough people talk about cash flow. It is the blood of a business. And I love that.

(16:12)
Final piece, Michael, I would say this is in the chess match still, but one of the best things I’ve done, and one of the reasons I started making my YouTube channel, I started drawing these little analysis of a property, was I learned a lot of data. By paying attention to the data for my actual properties, the winners and the losers, I was able to then model my next purchases, be more accurate on my next purchases. I was able to be a better investor in the future. So this is about the future, not just the past. You can actually learn from it.

(16:41)
I had not thought about that.

(16:44)
So the models of what’s a good deal. For example, I made a video that’s coming out here in a couple of weeks where I’m showing how to analyze a single family house, and I shared some of my data. I said, Hey, across all of my properties, I’ve averaged about 15 % in maintenance and expenses. So 15% of the rent has been the average maintenance and expenses together.

(17:05)
Now, what was the duration? Was that five years of history or what was that?

(17:09)
Last time I looked at it, it was about 15, 16 years.

(17:12)
I just want people to realize how rich that answer is. For 15 years, you’ve been collecting this data over all of the units. You then put that in a master thing. You divide by the unit count, and your historical average for a year is 15%. By having that, you became a better investor because you will use 15, or maybe you’ll use 17 to give you a spread, but makes you a better investor because you have factual data.

(17:38)
Yeah, exactly. That’s real. That’s real numbers. And that gives you confidence. So when you’re making an offer to someone, you’re not just saying, I think it’s that, I think it’s that. Well, no, I actually own a property in that neighborhood, and the expenses were that on that property. You now have unfair advantage over the people because you have real evidence, you have real confidence Confidence is the currency. Confidence is what makes you a good investor. It allows you to walk away from some deals that are just not good. And it allows you to make an aggressive offer on other deals where you’re like, All right, I know what this could do. This has got a lot of potential because I’ve tracked another similar property nearby, and I think I could do just as well on this one.

(18:17)
One thing about bookkeeping that I didn’t cover in this video is how to figure out how much taxes you pay when you sell a rental property. But my next video goes into a lot of detail and shows a case study of how you actually do that, and it shares a free spreadsheet if you want to figure out how much taxes you owe on your own rental property. So check that video out. I will warn you that a lot of the comments have been shocked about how much taxes they actually had to pay, but it’s better to know upfront before you actually sell the rental property. So check that video out. It’ll be above me here and also in the video or podcast description below.