5 Common Real Estate Accounting Mistakes (and How to Fix Them)

Rental property financials often look clean at first glance — until you dig into the details. Whether you're preparing for a refinance, a capital event, or just want investor-grade books, there are a few recurring accounting issues that can undermine the integrity of your reports.

Here are five areas where we consistently see problems — and how to clean them up:

1. Prepaid Rent Is Not Revenue (Yet)

If rent is collected before the 1st of the month, it hasn't technically been earned. That early payment should be recorded as prepaid rent, a liability on the balance sheet. Once the new month begins, it’s recognized as rental income.

Why it matters: Treating prepaid rent as income too early inflates revenue and understates liabilities. It's also a quick way to signal unsophisticated accounting to lenders or investors reviewing your financials.

How to correct it: Review rent deposits from the final week of each month. Reclassify those to prepaid rent and reverse them into income on the 1st of the following month.

2. Property Taxes Need Monthly Allocation

In most jurisdictions, property taxes are either billed in arrears or prepaid in lump sums. Booking the entire amount in one month — typically January or October — distorts expenses and makes it harder to measure performance consistently.

Best practice: Record property taxes on a monthly accrual basis.

·         If taxes are paid in arrears, accrue the expense each month and reduce the liability when paid.

·         If prepaid, book a prepaid asset and allocate it monthly over the covered period.

3. Prepaid Insurance Shouldn’t Skew the P&L

Insurance premiums often cover 6–12 months. Booking the full amount in the payment month results in a spike in expenses followed by months of underreporting.

Fix it: Treat insurance premiums as a prepaid asset and expense them evenly over the policy term.

When policies are financed, you’ll also need to split out the down payment (prepaid) and track the loan obligation separately to avoid misstating both assets and liabilities.

4. Misclassified Repairs Can Throw Off Reporting

Large one-time expenses — like tenant improvements or system upgrades — often get incorrectly recorded as repairs and maintenance. This inflates monthly expenses and masks capital improvements that should be depreciated over time.

Safe harbor: Use the IRS’s $2,500 per-item threshold as a guide. Anything above that should be reviewed for capitalization.

Routine monthly review of the R&M account helps identify items that should be reclassified and prevents financials from appearing lopsided.

5. Lumpiness Indicates Deeper Issues

One of the simplest ways to assess the quality of real estate financials is by running a monthly P&L across 24 months. If expenses spike and drop inconsistently, it’s a red flag.

Lumpiness = cash-basis shortcuts or missing accruals.

Sophisticated books should show a smooth trend line — not monthly surprises. Cleaning this up gives stakeholders more confidence in the numbers and makes portfolio performance easier to track.

Need Help Cleaning Up Your Real Estate Financials?

If you're managing a rental portfolio or preparing for a transaction, I help property owners, managers, and investors establish clean, accrual-basis books that hold up to scrutiny.

Let’s bring order to the numbers.
📩 Contact me to schedule a consultation.