Setting up mortgage for Rental Property

tcmccormicktcmccormick Member Posts: 9

I have looked through all the postings and have attempted to set up this mortgage we have on an STR property. Not sure I have done correctly so please advise where I may have gone wrong.

  • Property purchased for 360,000 closed 5/31/2018
  • 20% down payment 72,000 which shows up in Property Equity
  • Mortgage after down payment 288,000 (we paid all closing cost)
  • As of April pmt we have paid so far 11,032 interest and 3,774 toward principal
  • Per thread I found in Wave I set up in Liabilities Mortgage Interest and Mortgage Payable and when the mortgage payment hits I post using the Transfer to these two accounts for Mortgage Interest and Payable
  • I am concerned this is not set up correctly because at the bottom of this Account Balances report with dates set to when we started this rental business the amount is 546,057.88. This does not seem correct so I think I have something entered on the wrong side of the ledger or mayb entered twice. Any help is much appreciated.




Comments

  • MikegMikeg Member Posts: 587 ✭✭✭

    tcmccormick,
    A lot to look at there. So from I see.
    You are missing the asset. Your entry to book the acquisition(don't see any closing costs) should be
    Debit - Building 360,000
    Credit Mortgage Pay 288,000
    Credit Equity 72,000
    Note here - you need to break out land from building. You can depreciate the building but not land so they should be segregated on the balance sheet. Also, if any personal property was transferred that should come out of the 360 too.
    Where did the 72k come from? If owner contribution should be posted as that.
    You would expense the interest and not post it as a liability. That is why you have a negative liability. Debit interest expense for the 11k and credit the liab. Should correct that.
    You will also need an asset account for the escrow. As you have the payment being broken down into three they would go reduction of liability (principal) reduce income (interest expense) and increase an asset (escrow payment)
    Let me know if you have any other questions. Keep me in mind if your looking for great CPA.
    Mike G, CPA
    www.mgfinancial.net
    Affordable Solutions For
    Your Small Business

  • tcmccormicktcmccormick Member Posts: 9

    Hello Mike,
    Really appreciate you taking the time to help me get this set up. I have attempted to make the changes per your instructions. I think it is looking better, but still not sure I have got this right.
    I have attached how my balance sheet looks now after these changes, how I set up the initial Journal entry to start the mortgage, and how I am posting my mortgage payments. I know you mentioned depreciation and I do have the house and land broke out separate, but not how or when to enter depreciation. Again thank you so much for you help!
    Thanks,
    Tommy


  • MikegMikeg Member Posts: 587 ✭✭✭

    Tommy,
    Yep looks much better. Depreciation is computed based upon the life of the asset. In your case, based upon the name given above, I'm assuming residential real estate. The IRS gives this a 27.5 year life using a straight line. So if the building was in service the entire year it would be 278,907/27.5=10,252. of annual depreciation. You would do a journal entry to debit depreciation expense for the 10,252 and credit accumulated depreciation. Note this is annual. In terms of frequency, that's a personal choice how often you want to post. You would take the annual amount and divide by your frequency so that at year end, the amount in depreciation expense would agree to the deduction.
    You should be able to verify the balances of the mortgage payable and escrow back to the mortgage company. The negative cash above does not appear correct. If this activity is being funded with your personal funds, meaning there is no real cash account, then you would post income and expenses through owners equity rather than a fictitious cash account. As an example, you rent the beach house and receive 1,700 in rent which is deposited into you personal account. Debit Owners equity and credit Rental Income for the 1,700. You pay the mortgage out of your personal account Debit mortgage payable, interest expense and escrow and credit owners equity. If your more comfortable using the cash account you can, just remember it represents owners equity. Hope that makes sense.
    Mike G, CPA
    www.mgfinancial.net

  • tcmccormicktcmccormick Member Posts: 9

    Thank you, Mike. Yes I think it does. I noticed that negative on the Beach House account and was trying to figure out why. So, as you said, I assume this is from transactions entered on the Beach House account, but actually the funds came from somewhere else. For example we may have bought something for the house with our personal Southwest Visa, entered the expense, but since the funds came from somewhere else this creates a negative in the Beach House account. Does that sound right? I will try to track that down and see where missed that. Thanks again!
    Tommy

  • MikegMikeg Member Posts: 587 ✭✭✭

    The negative would represent expenses over income that were funded by your personal funds or in other terms owners equity. Like I mentioned you can keep that account but, personally I would not since it does not tie back to anything. Possibly the same with the Visa. If the Visa has both personal and rental business expenses, I would probably leave off as well. Since there is no cash account in the rental properties name, all payments would come from your personal funds as well.
    Mike G, CPA
    www.mgfinancial.net

    edited April 28, 2019
  • MikegMikeg Member Posts: 587 ✭✭✭

    Tommy,
    I see you provided a date of closing. So depreciation based upon the 278,907 would be 6,340 for the year.
    Mike G, CPA
    www.mgfinancial.net

  • tcmccormicktcmccormick Member Posts: 9

    Hello Mike,
    Again really appreciate all your help. I wanted to run this past you. I saw someone suggest to enter personal mileage into Wave was to create a Vendor called Mileage and create a payable coding it to mileage expense. I did that but also thought maybe that would be a way to get all the expenses I paid outside of the bank account I have set up for our rental business. I can removed the transactions that I originally entered from this bank account which caused the negative. From here on I am trying to make sure all transactions come from my business bank account so everything will just import from the bank. This is to clean up all the entries I have already done from personal Visa, personal checking, etc. In essence, I am the vendor getting paid back from my business. It seems to be looking as if this will. Do you see anything wrong with this approach? Is there a better or easier way to do this? Thank you, Tommy


  • MikegMikeg Member Posts: 587 ✭✭✭

    Tommy,
    I do not see anything wrong with this approach, it will get you to the same answer. For me personally, and the clients I do accounting for, I skip the create vendor part because it adds an extra step. However, there is nothing wrong with it. I'm assuming that will zero out the negative cash on hand? Always a good practice to keep business transactions all in one place and limit any personal items in the business accounts.
    Mike G, CPA
    www.mgfinancial.net

  • tcmccormicktcmccormick Member Posts: 9
    Awesome! I was hoping I wasn’t totally in left field. I have seen the err of my ways and have since tried to always run all transactions through my business checking account so it pulls in transactions from that bank account. Hopefully, when I get all these posted I will be good. Thank you for all the help!
    Tommy
  • MikegMikeg Member Posts: 587 ✭✭✭

    Anytime, keep me in mind if your looking for a CPA. I service clients from coast to coast with affordable solutions. Published pricing on my website.
    Mike G, CPA
    www.mgfinancial.net

  • tcmccormicktcmccormick Member Posts: 9
    Great and thank you. We’re about to purchase another rental so may need to.
    Thanks Tommy
  • AlirezaAlireza Member Posts: 3

    Hi all,
    I have done the steps that were mentioned here. However, when I generate my P&L report, the liability accounts do not show up in the report. Therefore, the mortgage principal does not show in my P&L report. Can anyone please let me know why the liabilities do not show up in the P&L reports?

  • tcmccormicktcmccormick Member Posts: 9

    I do not think you will see your Liabilities in your P&L report. Check the Account Balances report or General Ledger.
    P&L will just show your income and expenses.

  • AlirezaAlireza Member Posts: 3

    @tcmccormick said:
    I do not think you will see your Liabilities in your P&L report. Check the Account Balances report or General Ledger.
    P&L will just show your income and expenses.

    Thank you, that is correct.
    However, how do I make sure the down payment that I paid for the mortgage shows up in P&L report?
    The down payment can very well be involved in my potential loss (or profit), based on whether I sell my asset at a higher or lower price.

  • tcmccormicktcmccormick Member Posts: 9

    It does not show in mine either, but I may have mine incorrect. Hopefully someone else that knows can answer.

  • MikegMikeg Member Posts: 587 ✭✭✭

    @Alireza,
    A down payment is not a deduction on the P&L. See my first response above as to how to correctly get a building on the books. The simple way to think of it is that you have an asset - Building. It has a debit balance. For the balance sheet to balance you need liabilities/equity. That would be the mortgage loan. If a down payment came from the owner, then there is the missing amount which would be equity.

  • AlirezaAlireza Member Posts: 3

    @Mikeg said:
    @Alireza,
    A down payment is not a deduction on the P&L. See my first response above as to how to correctly get a building on the books. The simple way to think of it is that you have an asset - Building. It has a debit balance. For the balance sheet to balance you need liabilities/equity. That would be the mortgage loan. If a down payment came from the owner, then there is the missing amount which would be equity.

    Hi @Mikeg ,
    Thank you for your response.
    Now I understand the process. However, when selling my house (i.e. sales of asset), how come this sale is shown under P&L report? Is there anyway to make it so that the sale of an asset is not shown as an income, and therefore not shown in P&L report?

    edited January 16, 2020
  • MikegMikeg Member Posts: 587 ✭✭✭

    @Alireza,
    I'm assuming you mean a rental property. When you sell and asset, the proceeds are recognized as income (not sales). You would then debit (accumulated depreciation) and credit the asset (building) that was sold from the balance sheet to the income statement. You would recognize any gain or loss on the disposition on the income statement. Payoff of debt is not an expense.

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