When about half of your gross rental income goes toward paying the operating expenses of a rental property, it makes good business sense to make sure that you are collecting as much rent as quickly as you can.
Even if you have only one rental property, it can be far too easy to forget to charge the tenant a late fee or overlook opportunities for earning more rental income.
That’s why a rent ledger is a key financial tool real estate investors use to help maximize cash flow and increase property value.
What is a Rent Ledger?
A rent ledger is a report that shows you the detailed payment history of each tenant without having to read each lease, dig through payment receipts, or review your bank statements.
The document summarizes key information such as rent payments received from each unit or property, the amount the tenant paid, the amount of upcoming rent, and if there is an outstanding balance due.
In addition to up-to-date payment information, the rent ledger also contains the tenant information such as tenant names, address, and contact information. That way, if there is any unpaid rent, the tenant can quickly be contacted with a reminder to pay the rent, followed up with a late fee notice.
Why a Rent Ledger is Important
The reason people invest in rental real estate is for the income the property generates. A rent ledger is similar to an accounts receivable report that all businesses use to keep a detailed report of income received and receipts that are still open or outstanding. Before you can pay any operating expenses and the mortgage, you need to collect the monthly rent from the tenant.
By reviewing the rent ledger, you have a real-time overview of the amount of cash that has come in at a given point in time, and the amount of income that still needs to be collected. Based on the information the rent roll provides, you can then review your accounts payable to determine how quickly you can pay any outstanding invoices to your vendors or deposit remaining profits into your own bank account.
While the rent ledger helps you monitor incoming cash flow, the rent ledger report also provides documentary evidence if you need to begin the eviction process with a tenant due to non-payment of rent. The rules for evicting a tenant vary from state to state, but one thing a landlord always has to do is to prove that the rent was not paid.
A rent ledger is one of the key documents used in court during an eviction. After successfully evicting a bad tenant, you can regain control of your property, make any needed repairs, determine how much of the security deposit will be withheld to pay for damages, and quickly turn the rental property over to another more qualified tenant.
Ways to Use a Rent Ledger
Owners and property managers, buyers, lenders, and tenants all have uses for a rent ledger. The rent ledger report helps to answer important questions including:
- What is the rental payments history?
- How long has each tenant occupied the rental property?
- Is the rent currently being paid as agreed to in the lease?
- Have late fees been assessed if a tenant pays the rent late?
- How likely is it that the current incoming cash flow will continue?
- Are there opportunities to increase cash flow?
Owners & Property Managers
Owners and property managers, and buyers and lenders use a rent ledger report in similar ways, although their reasons for using the report are somewhat different.
When you sell a rental property, the goal is to maximize the purchase price (or sometimes sell as quickly as possible).
One of the best ways to sell a property for top dollar is to demonstrate to the buyer that the rental property is generating solid, consistent rental income. By reviewing the rent ledger, owners and their property managers can easily see if there are any tenants with past due rent, assess a late fee, and notify the tenant of the total amount of rent due.
If any leases are due to expire within the next 90 days, the tenant can be contacted regarding a lease renewal. Or, if the tenant doesn’t plan on renewing the lease, the property can be pre-marketed on a rental listing website to minimize the amount of lost rental income in between tenant turns.
By running rent comps and comparing the comparables report to the rent ledger, it is also easy to see if any tenants are paying a below market rent. If they are, there may be the opportunity to raise the rent when a lease comes up for renewal or the property is marketed to a new tenant.
Finally, the rent ledger report also shows the amount of security deposit being held for each tenant. When a tenant moves out, there may be damage caused by the tenant beyond normal wear and tear.
After conducting a move-out inspection, an owner or property manager can review the rent ledger to determine how much of the security deposit could be used to pay for damages. By using the security deposit to pay for repair costs, a property owner can use the tenant’s money instead of his own to pay for repairs, which helps to keep net operating income (NOI) up and property value high.
Buyers & Lenders
One of the biggest concerns that buyers and lenders have is how much rental income the property will generate in the future. Because buyers purchase rental property for the cash flow, no buyer wants to close on a deal only to see the rental income begin to decline a few months later.
When lenders conduct their underwriting to decide how much financing to provide, a key financial metric used is the debt service coverage ratio (DSCR). The DSCR is a ratio that compares the net operating income available to the debt or mortgage payments.
The debt service coverage ratio is calculated by dividing the net operating income (NOI) by the total amount of debt service.
For example, if a single-family rental home generates $18,000 in gross annual rental income and the operating expenses (excluding the mortgage) are $10,000 per year, the NOI would be $8,000. If the total annual debt service (P&I) is $6,000 then the DSCR would be a little over 1.3.
Most lenders look for a DSCR of at least 1.20, so in this example the property is generating enough net operating income to pay the mortgage. However, assume a rental property has a history of inconsistent cash flow, perhaps caused by poor tenant screening or bad property management. In a situation like this, both a buyer and lender will wonder if the rental income will decline in the future.
Let’s say the NOI declines to $6,500 per year due to increased tenant turnover. The DSCR would be only 1.08 with barely enough operating income left to cover the mortgage. The buyer would most likely have trouble qualifying for a loan because of the low rental income unless the seller agreed to a lower sales price for the property.
Buyers and lenders can also uncover opportunities for generating additional rental income.
For example, the rent comparables may show that the current rents are below market, so as the leases renew a new owner may be able to raise the rent. Of, if a tenant has a pet or a roommate, a new owner may be able to begin charging additional rent for an extra tenant or pet without waiting for the current lease to expire.
Tenants
Tenants can also use a rent ledger to their advantage when applying for a new home to rent. By submitting a copy of the rent ledger report to the new landlord, a tenant can demonstrate that they had a good rental payment history with the previous landlord.
The rent ledger can also speed up the approval process for a tenant because oftentimes prior landlords or their property managers are slow to respond to reference check calls from the new landlord.
A tenant can also use the rent ledger report to defend themselves if there is a dispute about rent payments or an unlawful eviction. For example, a tenant can compare their bank statement showing when the rent was paid to the landlord’s rent ledger report and immediately address any inconsistencies on the rent ledger. In the case of an unlawful eviction, a tenant may sometimes be awarded damages if the eviction goes before a judge and the landlord is in the wrong.
Free Rent Ledger Template
Each line on the rent ledger contains information about the tenant and the property they are renting. Data includes the tenant name and address, size of the property, number of bedrooms and baths, the amount of rent paid, and any outstanding rent or additional rent such as pet rent.
Here’s an example of a rent ledger that can be created with Google Sheets, Microsoft Excel, or OpenOffice Calc:
Readers of this article can download this free rental ledger template in Sheets or Excel, make a copy, and edit the spreadsheet to customize the rent ledger for your specific rental property holdings.
Wrapping Up
A rent ledger provides details of the rent paid by each tenant in each property a real estate investor owns, or a property manager manages. The user can tell at a glance if the rent was paid on time, if there is any past due rent, and whether or not a late fee was assessed per the terms and conditions of the lease.
The rent ledger can also reveal hidden opportunities to generate incremental rent to increase cash flows, ROI, and property value.
