NOTE: this is a guest post from long time reader and subscriber, Ray. He has actively invested in real estate as his career for over 20 years and has agreed to share a few of his experiences. Thanks Ray!
When I first started investing in real estate, I had no idea how much paperwork would be involved. I mean, you hear jokes all the time about signing your name multiple times but no one can ever anticipate how much paper a real estate transaction can generate. And if you’re investing in a decent sized apartment complex, oh boy, there is more paperwork than I ever imagined. Yes, investing in and managing real estate generates a hefty stack of paperwork, but the good news is: you CAN manage it. Here’s a simple breakdown of the key documents that I either keep on file or create during my ownership of any property. Oh yeah, I NEVER throw any real estate investing paperwork away.
Real Estate Investing Documents I Always Keep on File
You’ll need several types of documents to buy and prove ownership of your property. Keep these in a safe place:
Ownership documents are the paperwork related to the property sale, including the deed, purchase agreement, inspection reports, and so on. It‘s also a good idea to keep copies of written communication you’ve had with lenders, agents, sellers, and others involved with the transaction. I learned early on to take notes when I received or made any phone calls. Most of the time, those notes will actually hold up in court should that circumstance arise. Note taking isn’t just for school kids!
Loan documents are generated during the process of applying for and securing the mortgage on your real estate investments. Your lender will typically provide you with copies of each of the following:
- Investment loan application: This includes the loan amount, financial projections for the property, and current leases on the property. The document gives the lender as much information as possible about your personal history, credit status, and financial standing.
- Loan commitment: This letter from the lender approves your loan and all dates, fees, and conditions.
- Loan note: The loan note is a document proving that you’ve received the loan.
- Deed of trust: This document contains the account number, personal information, loan amount, and legal information associated with your mortgage (not to be confused with the deed on the property.)
Always keep careful tax records. Nothing can mess with your mind or your wallet that the taxman, so get a reputable accountant early in your real estate investing career. He or she IS worth the money, trust me.
Remember, you must declare income and expenses for all rental properties on the Schedule E portion of your IRS form 1040.
- If your expenses exceed your rental income: You might be able to claim a deduction against your income for the amount of money you lost.
- If your rental income exceeds your expenses: You’ll need to pay income tax on your rental income.
To support your claims regarding your rental income and related expenses, always maintain thorough paper records, keeping a separate file for:
- Everything you send to your accountant: They can lose stuff too.
- Copies of tenant checks: You will never regret making copies of those checks. I even make copies of money orders and cash when they pay that way. Any yes I enlarge the copies so as to avoid run-ins with the Secret Service.
- Receipts: Keep all receipts related to rental income, expenses, and major upgrades, such as renovations.
- Bank statements: Keep paper copies so you can check your records against the bank’s, in case accounting questions or irregularities arise.
Real Estate Investing Documents You Should Create
As you begin to rent and manage your property, you’ll need to create a number of documents to keep track of your expenses and your tenants.
Budget: Keep a detailed monthly budget that includes all expenses and income related to the property. This will help you track your financial position throughout the year and save headaches when tax season arrives.
Individual property records: I keep a detailed record of each property I purchase, its Profit and Loss statement, its maintenance records, its tenants, its appraisals, and anything related to that property.
Tenant records: I make files for each of my tenants and keep all related documents, such as copies of rent checks, on record. Maintaining thorough tenant records has helped my justify my position when I’ve had to evict tenants and also helped to defend myself in several lawsuits.
Maintenance records: I keep a running list of maintenance expenses on each property. When you first get started, I recommend keeping a list throughout one entire year. You can then use the total amount as a guideline for budgeting for repairs in future years.
Do I have double or even triple files on some of these items? You bet. All files that have a twin are red. Those that are part of triplets are green in color. This way, I can ensure that updates are current even on files where I have multiple copies of items (rent checks – two copies – one in the tenant’s file, one in the property file)
Organization Will Save The Day
It will also set you free, though in the beginning you may feel like a slave to the file cabinet. Once you establish a pattern and a habit, however, it becomes very easy. And if you really enjoy working for yourself as a real estate investor, a little paperwork is a small price to pay!