6 Common Mistakes Landlords Make Budgeting P&L

Most landlords spend all their time dealing with tenant complaints, city inspections, putting out fires (hopefully not literally!), shuffling tons of paperwork and a slew of urgent matters.

There’s also an incredibly tedious side to property management that many never find the time to address. It’s tedious, but it’s absolutely no less critical to the job than averting disaster and discerning bad apples. Let’s call it Financial Management, and it should be no surprise to anyone that it’s very easy to ignore it, which can eventually lead to financial ruin. Many landlords are so buried in the day-to-day struggle of property management that they don’t even know if they’re really making money or slowly sinking.

Let’s look at some common mistakes that affect proper Financial Management.

6 Common Mistakes Landlords Make When Budgeting & Monitoring P&L

Not Keeping Meticulous Records

Record-keeping is one of the most annoying and necessary parts of watching your costs. Every penny collected or spent affects your bottom line. The challenge is tracking your income and expenses such that you can use the data to know where you are financially now and can budget for the future.

Mixing Funds

It seems a lot of landlords mix security deposit funds with tenant rent payments and use the deposits to run their business. We’ve been hired by DIY landlords who didn’t have the liquidity to transfer the proper security deposits amounts to us because they had spent the funds. Even scarier, we’ve encountered the same problem when taking over properties from competitors. If you have to use security deposits to stay afloat, something is wrong somewhere. Do you really know where the problem is and do you have a solution?

Not Having A Budget

It’s amazing how many landlords create spreadsheets with all kinds of numbers when buying a property, but then “wing it” thereafter. Landlords get frustrated with tenants who live paycheck-to-paycheck, but actually do no better themselves. It can be difficult to create a budget when you initially purchase a property, as there are all kinds of surprise expenses and events. After that first year, though, you should have enough data to put together a budget going forward.

Just Copying Last Year’s Budget

Last year’s budget is a decent place to start this year’s budget from — but every year is different. You probably had some expenses last year that you won’t have this year, and there are probably some projects you intend to do this year that weren’t on the table last year. Copying the format of a previous budget isn’t a bad starting place, but don’t ever just blindly assume that the same numbers and the same assumptions are going to serve you as well this year as they did last year.

Lacking Profit & Loss Statements

Most landlords think they know how much they’re making or losing on their properties, but really don’t know until they do their taxes and look at their Schedule E. A business that only looks at their P&L once a year usually doesn’t last long, as they can’t see a problem to fix it until it may be too late. Even if you keep meticulous records and have a budget, they’re useless unless you have a system in place that can generate at least a quarterly P&L statement so you know where you are financially.

Not Reviewing Your Expenses

Building a relationship with a vendor — like a plumber, electrician, handyman and so on — is generally a good idea for any business that intends to stay in business.

Read more at biggerpockets.com

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