By Arda Bircan, the Founder of STR Loophole  

As I am running into more and more real estate investors with no proper bookkeeping systems, I’d like to address the consequences of poor bookkeeping and how it’s hindering investors’ ability to run a profitable business.

To run a successful short-term rental business, you need to track your income. You also need to calculate expenses, use tax deductions, and make projections. That’s where diligent bookkeeping comes in, and it’s an essential part of running a successful business.

I always advise fellow real estate investors the same thing. If you’re looking to purchase a short-term rental property, one of the first things you should do is hire a real estate accountant and get a bookkeeper on board. This is because there are important guidelines to meet as you run your short-term rental business and leverage STR tax loopholes to offset your active business income.

Additionally, you should open a business checking account and form a separate legal entity, like an LLC, for your short-term rental business to protect personal assets and clearly distinguish between personal and business finances.

So why running a successful short-term rental (STR) business requires diligent bookkeeping? Because it’s the only way to ensure you understand the financial health of your business.

Short-Term Rental bookkeeping involves recording and managing financial transactions for your vacation rental. This includes tracking all income and expenses.

Let’s delve into benefits of keeping accurate, up-to-date bookkeeping and accounting records.

Measuring Profitability:
Without accurate bookkeeping, you won’t know if your business is profitable. Short term rental income also varies based on seasonality, demand, and pricing. By tracking your income and expenses, you can manage cash flow effectively, calculate your net profit and identify areas where you can improve in your short-term rental business.

Tax Obligations:
The income from renting your property on Airbnb is taxable. So, it’s important to understand your tax duties as a short-term rental investor. You may be required to pay federal and state income taxes that apply to short-term rentals on the local level. For instance, you have an Airbnb in Fort Lauderdale FL. You take reservations through a direct booking website. You must pay FL sales tax and Broward County Tourist tax every month.

By tracking expenses and rentals accurately, you can easily follow tax rules and avoid penalties.

Financial Health of Your STR Business:
Accurate, up-to-date bookkeeping provides a clear understanding of the financial position of your STR business. By analyzing your profit & loss statement and balance sheet each month, you understand the profitability and growth of your business. You can make informed decisions on pricing, occupancy, and amenities. You can also optimize expenses for better profitability. If your records and books aren’t up to date, huge and costly mistakes can be made. Further, you will not have the ability to create accurate budgets and forecasts for your future income and expenses.

When you have your cash flow statements and balance sheets at your fingertips, your business dealings will be drastically improved. If your books are in order, it’s much easier to get the best loan terms from a bank for your next deal. It’s also much easier to attract investors with accurate, up to date financials. Potential investors can easily see your business’s financial health and your credibility.

One important note as it relates to STR Loophole:
If you plan to use the STR Tax loophole, you will need to track material participation hours spent on your STR property. From a documentation standpoint, if you ever to go under audit with the IRS, they going to want to see a time log and you to prove the time you spent in your rental properties. Thus, you can either use an excel sheet to keep track of your time or use an easy-to-use time tracking app called RepStracker, which streamlines the process of logging your material participation hours.