Real Estate Investing Accounting Glossary
Investing in real estate does not require a degree in business or finance, but understanding accounting terms does help. We’ve compiled a glossary of the most common accounting terms associated with rental properties. Each entry provides the term, definition, and additional details. Links to related resources are included with some of the terms for more in-depth discussion.
1099 Form
An IRS tax form to report dividends, interest, and self-employment income. See related entry: W-9 Form.
The business making payments is responsible for filing out and submitting this form. The IRS has specific guidelines for who must file a 1099 and what to report. Property managers and commercial real estate tenants should note the section on rent. Real estate investors should note the information on nonemployee compensation payments.
REI Hub can track vendor payments so you’re ready when it’s time to file 1099s.
Accounting
Recording and reporting of financial transactions, including the origination of the transaction, its recognition, processing, and summarization in financial statements. See related entry: Bookkeeping.
Accounting is different from bookkeeping because accounting looks at the bigger financial picture. Accounting covers income and expenses, profits and losses, changes in asset values, audits, money management, tax collection and remittance requirements, and reporting.
Accounting Period
The time span reported in a financial statement.
The REI Hub reporting feature lets you customize both the date range and the reporting period for your financial reports.
Accrual Accounting
Method of recording the financial effects of transactions and events in the period when the transactions occur as opposed to recording the transaction when cash is received or paid. See related entry: Cash Accounting.
In an accrual-based accounting system, a landlord would record an expense according to the invoice date, not the date when the landlord pays the invoice. REI Hub clients can choose to use accrual accounting by updating the accounting basis in their account settings, but the majority of REI Hub’s clients use cash-basis accounting.
Allocating
Assigning funds to different accounts, periods, properties, or units.
Real estate investors with more than one property can allocate, or assign, costs to multiple properties. For example, if a landscaping company maintains four rental properties owned by the same real estate investor, when the maintenance invoice arrives, the owner may allocate the expense between the four properties.
Amortization
An obligation’s gradual and periodic reduction through equal installments, usually with payments of principal and interest. As the loan amortizes, a small amount goes toward principal and gradually increases with each payment.
In real estate, this most often applies to debt, such as mortgages or loans. As the property owner makes mortgage payments, the loan amount is reduced, and a larger portion of the payment goes toward the principal and less to the interest.
Use REI Hub’s Loan Payment Template to break down your loan payments between the principal, interest, and escrow amounts.
Appreciation
Increase in the value of an asset.
Historically, real estate values appreciate as time passes. Home values often surpass inflation rates, especially in growing urban areas.
Asset
Anything owned that is expected to benefit the owner in the future. See related entries: Fixed Asset, Fixtures.
Land, buildings, property improvements, fixtures, and furnishings all count as assets for rental properties. Adding an asset in REI Hub is simple! Our Knowledge Base article “Creating a New Fixed Asset” has step-by-step instructions to walk you through the process.
Bad Debt
All or part of an account, loan, or note receivable considered to be uncollectible. See related entry: Write Off.
Unfortunately, sometimes unpaid rental income becomes uncollectible, or known as “bad debt.”
Balance Sheet
A report showing the business’s assets, liabilities, and equity.
Some partnerships may need a balance sheet for their taxes, and having a balance sheet is necessary for monitoring your business’s health. REI Hub’s Tax Packet has an option to include your balance sheet as part of the set, or you may run the report separately from the Asset Report menu. For a deeper dive into balance sheets, see our resource article “The Balance Sheet for Rental Properties.”
Basis
For tax purposes, the amount of your capital investment in a property.
When you purchase a new rental property, you’ll need to record the basis of your new asset. Closing statements can be intimidating, but we’ve got you covered with detailed instructions for recording the value of your new property.
Bookkeeping
The process of recording financial transactions and keeping financial records. See related entry: Accounting.
Bookkeeping focuses on setting up a chart of accounts, invoicing clients, recording transactions, and reconciling accounts. Using software like REI Hub makes tracking financial transactions easy.
Break-Even Point
The point when total revenues equal total costs.
To calculate the break-even ratio for your rental property, use this formula: [(Operating Expenses + Debt Service) – Reserves] / Gross Operating Income
Capital Expenditure
An outlay of funds to acquire or improve capital assets, like machinery or buildings.
At tax time, capital expenditures are treated differently from expenses, so how you record these transactions matters. For a comparison of capital expenditures and expenses, see our Resource article.
Cap Rate
The rate of return on a real estate investment property based on the expected income.
To determine your cap rate, divide your net operating income by the property’s current fair market value. Or simply run REI Hub’s Cap Rate report, which allows you to check the cap rate for both your full portfolio and individual properties.
Cash Accounting
Method of recording revenues and expenditures when they are received and paid. See related entry: Accrual Accounting.
In a cash−based accounting system, a landlord would record an expense when the invoice is paid, not according to the invoice date. REI Hub’s default setting is cash-basis accounting.
Cash Flow Statement
A statement of operating, investing, and financing activities that provides information on how the changes on the balance sheet and income affect your cash position.
Your cash flow statement helps you keep an eye on all incoming and outgoing funds during a set period.
Cash-on-Cash Return
A rate of return calculating the cash income earned on the cash invested in a property.
REI Hub offers several performance reports, including the Cash on Cash report, which measures the amount of cash flow compared to the cash spent on an investment property.
Chargeback
Money spent on a property by a landlord when the cost is the tenant’s responsibility.
This is also known as expense recovery. If you have to pay for a locksmith, damages caused by the tenant, or trash pickup, but the cost should be covered by the tenant, you can create a chargeback to send to the tenant.
Chart of Accounts
A financial organizational tool that provides a complete list of every account in a company’s general ledger, separated by category. See related entry: General Ledger.
A chart of accounts for rental properties usually contains categories for assets, liabilities, equity, revenue, and expenses. Many real estate investors use the Schedule E as the model for their charts of accounts. For help setting up your chart of accounts in REI Hub, see our Knowledge Base article.
Combined Financial Statement
A financial statement comprising the accounts of two or more entities.
To view combined financial statements for your properties in REI Hub, update the report scope and choose “Full Portfolio” in your report settings.
Credit
The entry on the right side of a double-entry bookkeeping system. It represents the reduction of an asset or expense or the addition to a liability or revenue. See related entries: Double-Entry Bookkeeping, Debit.
Each booked transaction in REI Hub has at least one credit and debit. If you’re new to rental property bookkeeping or REI Hub, we recommend that you read the REI Hub Overview and Getting Started Guide.
Debit
An entry on the left side of a double-entry bookkeeping system. It represents the addition of an asset or expense or the reduction of a liability or revenue. See related entries: Double-Entry Bookkeeping, Credit.
No matter what bookkeeping system you use, each transaction has at least two lines: one debit and one credit. Instead of creating each line or transaction individually, use REI Hub’s option to upload transactions or link your bank account.
Depreciation
The decrease in value of an asset over time due to use, wear and tear, or obsolescence. Also an expense category on the Schedule E. See related entries: Asset, Fixed Asset, Schedule E.
You may begin to depreciate property once it is ready and available for rent. According to the IRS, residential rental properties generally depreciate over 27.5 years (the “recovery period”). For more details on when depreciation begins and ends for rental properties, see IRS publication 527 (2020).
Double-Entry Bookkeeping
A method of recording financial transactions in which each transaction is entered in two or more accounts and involves two-way, self-balancing posting. The total debits must equal the total credits. See related entries: Credit, Debit.
REI Hub is a double-entry accounting system; each booked transaction has at least one credit and debit, and our system will only allow balanced transactions to be recorded. If a transaction is not balanced, you’ll receive a system error explaining why the transaction can’t be posted.
Equity
The amount of a business’s total assets minus the total liabilities. See related entries: Asset, Liability.
For an overview of your assets, liabilities, and equity, run a balance statement. The third section of the statement will show you the equity at the end of the reporting period.
Escrow
Money or property put into the custody of a third party for delivery to a grantee, only after fulfillment of specified conditions.
Homeowners generally think of escrow funds in relation to their mortgages, because many mortgages will include property taxes and homeowners’ insurance as part of the amount due each month. But when you’re buying a property, and you put down earnest money or a deposit, those funds go into an escrow account until the property sale goes through. For landlords, rent escrow, also known as rent withholding, is a legal process allowing tenants to temporarily submit their rent payments to a third party instead of the landlord.
To book your annual escrow expenses in REI Hub, see our Knowledge Base article.
Expense
Funds spent on a specific item or for a particular purpose.
Not all outlays are considered expenses in the eyes of the IRS, but ordinary and necessary expenses are deductible for your rental property.
Fair Market Value
The price at which property would be exchanged between a seller and buyer. See related entry: Tax Basis.
You can include an estimated market value for your properties in REI Hub. Although the market value isn’t required for tax reporting, it’s helpful for investors to estimate their equity, and the figure is used in several REI Hub reports. Estimated market values change over time. If you need help updating your property’s estimated market value, see our Knowledge Base article.
Fixed Asset
Tangible, long-term assets used in the continuing operation of a business. Fixed assets are unlikely to change for a long time. See related entry: Asset, Depreciation.
REI Hub’s Fixed Asset Schedule provides a breakdown of all your fixed assets, balances, and depreciation.
Fixed Cost
Costs that remain constant over a defined range of activity, volume, or period. See related entry: Variable Cost.
Think about costs that do not change from month to month: mortgages, insurance, subscription fees, etc.
Fixture
An attachment to real property that is not intended to be moved and would create damage to the property if it were moved.
When tenants move out, they can take all of their property, except items that are considered “fixtures.” If property has been incorporated into the land or will cause severe damage by removing it, then it counts as a fixture.
Flipping
Purchasing an asset, then quickly reselling it for profit.
Since properties purchased for flipping are never put in service, technically they aren’t rental properties, and they call for a modified accounting process.
Foreclosure
Seizure of collateral by a creditor when default under a loan agreement occurs.
According to the December 2013 Housing Scorecard, 3.6 million cumulative completed foreclosures occurred from April 2009 and October 2013. Foreclosures have serious tax consequences. For a detailed review of foreclosures, see IRS Publication 5550 (8-2021).
General Ledger
A collection of all asset, liability, equity, revenue, and expense accounts where companies record their transactions.
This collection of accounts is used to prepare all financial statements.
House Hacking
Finding ways to generate income from your home. Read more about accounting for house hacks here.
If you rent out a spare room, basement apartment, garage, storage unit, or garden plot that is part of your primary residence, you are house hacking. This is a popular method to help cover the mortgage or generate additional income.
Journal Entry
Transactions recorded in the general ledger. All entries should include the date, amount, and description of the transaction.
There are six kinds of journal entries: opening, transfer, closing, adjusting, compound, and reversing entries. These entries are used to show how transactions affect accounts and balances. You may need to use a journal entry if you have to defer revenue or expenses, correct previous entries, or write off debt.
Liability
Debts or obligations owed by one entity to another, payable in money, goods, or services.
Any loans, mortgages, or accrued expenses associated with your rental property are liabilities. The balances of your liabilities are shown on your balance sheet and cash flow statements.
Lien
A creditor’s claim against an asset. Liens restrict what owners can do with an asset.
Not all liens are bad. After all, a mortgage is a lien. However, some liens, especially involuntary liens, can affect your credit score negatively.
Net Income Statement (Profit & Loss)
A summary of revenues and expenses.
Available individually or as part of REI Hub’s Tax Packet, your net income statement shows you the gross revenue, expenses, and net income totals. This report is available at the portfolio, property, or unit levels.
Opening Balance
The debit or credit balance of a general ledger account in a company’s books that is brought forward at the start of an accounting period. See related entries: Credit, Debit, General Ledger.
When you switch to REI Hub from other accounting systems, you’ll need to enter opening balances for your accounts. Use our step-by-step instructions to make sure your balances are set up correctly.
Portfolio
The combined holding of more than one asset by an investor.
Your portfolio is the top level of the reporting structure in REI Hub. The portfolio consists of your separate properties, which contain any individual units you may own. Some reports, like the balance sheet, are only available at the portfolio level, but most of REI Hub’s reports are available at the portfolio, property, or unit levels. For more information on portfolios, check out our Knowledge Base article.
Prepaid Expense
A cost incurred for goods or services that will be received at a later time.
An annual insurance premium is a prepaid expense. The property owner makes one payment per year, but the service is provided each month.
Real Estate
A piece of land and all physical property related to it, including buildings, fences, and landscaping, as well as the air above and earth below the property. See related entry: Real Property.
Real estate is made of two categories, residential and commercial, either of which may be leased. Industrial real estate is a subdivision of commercial real estate.
Real Property
Land and improvements, including buildings and personal property, that are permanently attached to the land or transferred with the land plus common law rights. See related entry: Real Estate.
Real property includes the physical property of real estate, but it also grants the property owners the right to possess, control, enjoy, exclude, and dispose of the property as they see fit.
Rent Roll
A register of rents including the unit information and the amounts due.
This handy report shows you how much rent you’ve collected per property or unit in a month. See our Knowledge Base article for details on what is and isn’t included in REI Hub’s rent roll report.
Return on Investment (ROI)
The efficiency of an investment, or the measurement of the possible profit if the investment were sold.
To measure the ROI, compare the amount you’ve invested in the property (initial purchase price plus all additional costs) to the property’s current value.
Schedule E
A supplemental part of Form 1040, the US Individual Income Tax Return, used to report net income or loss.
For the specifics on how the Schedule E relates to rental property owners, see REI Hub’s Schedule E overview.
Security Deposit
An amount of money that a renter pays when beginning to rent a property. This amount can be used to pay for any damage that the renter causes to the property.
REI Hub has options under the Booked Transactions menu to quickly record security deposits received, refunded, or retained. Check out our security deposit FAQ for more information.
Tax Basis
The figure used in the calculation of a gain or loss for tax purposes. The formula for the tax basis is the original cost of an asset minus the accumulated depreciation.
Use your closing statement to record a journal entry for any new property purchases. Your journal entry will set your property basis.
Tax Deduction
An item you can subtract from your taxable income to lower the amount of taxes you owe.
The IRS has rules about what can and can’t be deducted when it comes to rental properties. Use REI Hub’s Tax Time Double-Check to help you identify easily missed deductions that can have a big effect on your tax liability.
Variable Cost
Expenditures that change in proportion to the output or measure of volume. See related entry: Fixed Cost.
Think of repair expenses or utility bills that vary from month to month. If your rental property has oil heat, your invoice for oil will be higher during the winter than it will be during the summer.
W-9 Form
The Request for Taxpayer Identification Number and Certification form from the IRS. See related entry: 1099 Form.
Use Form W-9 to provide your taxpayer identification number to the person who is required to file an information return with the IRS to report income paid to you, real estate transactions, mortgage interest paid, etc. For detailed information on W-9 forms, see the IRS instructions. Providing a W-9 form allows filers to confirm their information for future 1099 forms.
Write Off
Eliminating an asset from the books. See related entry: Bad Debt.
When rent becomes uncollectable, it becomes bad debt. If you invoice your tenants for rent each month and carry the uncollectible rent balance on your books, the higher accounts receivable balance overstates the amount of rent that you’re expecting to receive. To write off the bad debt, you may use either the direct write-off method or the provision method. Check with your accountant to see which method is best for your business.
