The balance sheet is one of the three most important financial reports for landlords. It’s a snapshot of your rental’s finances showing what you own, what you owe, and what equity you have. 

If you’re new to rental property accounting, or just need a refresher, understanding the key financial reports is crucial—and there’s no better place to start than the balance sheet.

What is a balance sheet?

A balance sheet reports the value of assets that your rental property business owns, like bank accounts, equipment, buildings, and land. It also shows what liabilities the business owes, such as a mortgage, credit card balances, or short-term loans. This report also shows equity, like capital contributions, owner draws, and reinvested profits.

Unlike a profit and loss statement that reports data from a date range, the balance sheet focuses on one specific date.

Why are balance sheets important for landlords?

Balance sheets are part of the core three accounting reports for good reason. Real estate investors use balance sheets at every stage of their business, from getting a loan to selling a property:

• Securing funding: When you apply for a loan, the lender will use your balance sheet to assess the financial health and creditworthiness of your business.
• Recording property basis: Without an accurate record of a rental’s basis, you won’t have a clear starting point for depreciation calculations, 1031 exchanges, or taxes associated with selling the property.
• Analyzing financial practices: Are the business’s transactions accurately reflected in the books and accounts? Examining the balance sheet will help you evaluate the company’s bookkeeping practices.
• Evaluating risk: Has the company borrowed too much money? Can it meet its financial obligations with the cash it has on hand? The balance sheet will help you answer these questions and decide if an opportunity is a good investment.
• Collecting data for metrics: You need data before you can analyze key performance metrics for your properties. The balance sheet provides crucial information, like bank balances, loan principal owed, and investor distributions.
• Reviewing the business: Active oversight and regular financial reviews are important for rental property owners. Your balance sheet helps you answer questions about the state of your business. How much cash do you have on hand? Is there enough equity in the business to refinance a property? Has the security deposit been returned?

Three Things That You Must Include on a Balance Sheet

The balance sheet is a three-part report based on the accounting equation:

Assets = Liabilities + Owner’s Equity

This equation is the foundation of double-entry bookkeeping, and assets always equal liabilities and equity—that’s why it’s called a balance sheet. Your balance sheet is a visual representation of the relationship between these three account types.

Assets

Assets are the resources owned by the business. Think about your bank accounts, petty cash, accounts receivable, appliances, office equipment, buildings, and land; list them all in this section.

Liabilities

The liabilities section shows what debt the business has taken on to finance its assets. This section is where you list your mortgages, credit card balances, lines of credit, refundable security deposits, and accounts payable.

Equity

Equity accounts show how much the owners have invested in the business. Capital accounts tell you how much each investor has contributed. Owner draw accounts report how much money investors have taken out of the company. Retained earnings show how much of the profits have been reinvested in the business.

Key point: Only financial systems that use double-entry accounting can produce balance sheets.

How to Prepare a Balance Sheet for Rental Property

Landlords can prepare a balance sheet by following this format:

Start with Your Assets

List assets in order of their liquidity, or how easily you can convert them into cash, and divide them into two subcategories: current and long-term assets.

In the current assets section, include a line for each of these items:

• Checking accounts
• Savings accounts
• Petty cash
• Earnest money deposits
• Escrow accounts
• Accounts receivable (money that tenants owe you)
• Prepaid expenses, like insurance or advertising

Once you’ve listed all your current assets, add a line for the sum of the assets in that subsection.

In the long-term assets section, each of these items should get its own line:

• Accumulated depreciation
• Buildings
• Capital improvements
• Equipment
• Furniture
• Land
• Machinery
• Vehicles

Then, add a line for the sum of your long-term assets and another line to total all your assets, both current and long-term.

List Liabilities Next

For the second section, record all your liabilities, meaning any money you owe to others. If you have multiple credit cards or loans for the business, group similar liabilities in subcategories.

• Accounts payable
• Credit cards
• Lines of credit
• Mortgages
• Security deposits held
• Short-term loans
• Wages payable

Add a line for each of the subcategories that shows the sum of the liabilities from that category, and a line for the total liabilities.

Report Equity in the Final Section

The number of lines you’ll need in this section depends on how many investors you have. Usually, you’ll need two lines per investor—one line that shows capital contributions and one that reports investor distributions. But at a minimum, you will need three lines in the equity section:

• Net income: This is the total earnings of the business after accounting for expenditures.
• Retained earnings: These are the net earnings (or losses) accumulated from prior years.
• Owner funds: This line shows the net of contributions to and withdrawals from the business.

Add a line to tally up the figures in the equity section, then add another line that shows the total of the liabilities and equity. Remember, your total assets should equal your total liabilities and equity.

Sample Balance Sheet for Rental Property

Use this example rental property balance sheet as a reference for one property.

How Balance Sheets Relate to Other Financial Reports

Your balance sheet helps you understand your business’s financial performance and liquidity with a high-level view. It provides a foundation for calculating rates of return and ratios for investors, as well as initiating financial analysis.

But remember, this report has a limited scope: It’s a snapshot of just one point. If you look only at the balance sheet, you can’t accurately gauge your rental’s health or performance. On its own, the report doesn’t help you spot trends in your business.

You need additional reports and metrics, such as profit and loss statements, cash flow statements, and rent rolls, to give you context for your analysis.

The same goes for cash flow and profit and loss reports. Relying on one report exclusively gives you an incomplete picture of the business’s health. To understand your rental property’s performance and health, you need a comprehensive set of financial reports.

They all work together to give you a complete picture of your rental’s finances, and a change on one report will reflect in the others. Here’s how:

Balance Sheet and Cash Flow

Changes in asset or liability balances reflect whether cash is coming into or out of the business.

The cash flow statement’s final cash balance becomes the current period’s cash balance on the balance sheet.

Balance Sheet and Profit and Loss

The profit and loss statement connects to the balance sheet through the retained earnings figure. It represents the collective total of all net earnings (or losses) of the business minus owner draws.

Your profit and loss also shows the depreciation for the date range of the report, while the balance sheet shows your accumulated depreciation and its effect on asset values.

Common Mistakes on Rental Property Balance Sheets

Accounting for rental property has many moving parts, so making mistakes is easy, especially if you aren’t used to working with financial reports. Check your balance sheet for these common errors:

• The balance sheet isn’t balanced. If the figures don’t balance, that means the report is relying on incorrect data, is missing data, or has calculation errors.
• Security deposits are listed as assets. Refundable security deposits should be a liability account, not an asset. If a tenant violates a lease and forfeits their deposit, the deposit will move from the liability account to an income (asset) line.
• Transactions aren’t recorded. If you forget to record a transaction—or intentionally omit one—your books are incomplete. Depending on which transactions you leave out, or how many, this can seriously skew your financial data. This is especially true of depreciation, which some rental property owners forget to record.
• Transactions are recorded incorrectly. Occasionally, digits get transposed. Sometimes transactions are posted to the wrong accounts. Remember to review your work before you hit save, and if you aren’t sure which account to use, check with your CPA.

Did you know? Your balance sheet shows the book value of your assets—that’s different from the market value. Sometimes newcomers to the rental property industry confuse the owner’s equity line on the balance sheet with market equity. To determine your portfolio’s market value, you need a portfolio value by property report, not the balance sheet.

How to Prevent Balance Sheet Errors

Having clear, organized financial data is crucial for accurate reports. You can prevent errors on your balance sheet by following these steps:

Run a trial balance report. Before preparing the balance sheet for rental properties, review the trial balance report, which lists your chart of accounts showing credits and debits (that should be equal).

Update your books frequently. Set reminders or block off time on your calendar for bookkeeping. By working on your books regularly, you’re more likely to spot problems quickly and less likely to forget transactions, misplace paperwork, or make late payments.

Reconcile your accounts each month. This step compares your bank or statement balances to your book balance and helps you catch missing transactions and transposed digits.

Schedule financial reviews. If you don’t review your books, you won’t know whether your business is healthy. Commit to active oversight with monthly reviews of your reports. Use quarterly reviews as planning sessions and annual reviews for tax prep and long-term planning.

Keep supporting documentation organized and accessible for reference. If there’s a problem with your books, you’ll need access to the paperwork related to the transactions in question. Having an organized system for your statements, receipts, and other documents will save you time if you need to confirm dates and amounts later on.

How TurboTenant Can Help

Managing rental properties is easier with accurate balance sheets—and TurboTenant helps you create them without the hassle of spreadsheets. Our rental-focused accounting platform automates data imports, links accounts, and offers a real estate–specific chart of accounts, so there’s no need for manual entry or complex setup.

We’re here to simplify rental property bookkeeping—that’s why we include built-in templates and customizable rules to keep your records accurate. Plus, you can generate professional balance sheets and other reports at the unit, property, or portfolio level. No spreadsheets or accounting degrees needed.

Spend less time and stress on spreadsheets and more time growing your rentals with TurboTenant Accounting—sign up for your free account today!

Disclaimer: This blog is for informational purposes only and is published by TurboTenant. It is not legal, financial, or tax advice. Laws and regulations for landlords vary by state and locality and may change over time. Always consult a qualified attorney, accountant, or local housing authority before making decisions related to your rental property. The publisher and authors assume no responsibility for actions taken based on the information provided.