I lend rather than own, and I've got two private notes I'm carrying. The servicer sends me a statement every month showing what came in and what got remitted to me. As far as I can tell my whole year is twelve deposits and one form at the end. What is a bookkeeper actually doing with that? I keep hearing that note investors need real books and I can't see where the work is hiding.
Answer
@vellum has the core of it. A payment on a note you hold splits into interest, which is income, and principal, which reduces the balance you're carrying as an asset. Twelve deposits of the same dollar amount can be twelve different splits, and the split comes from the amortization schedule, which is the table showing how each scheduled payment divides between interest and principal over the life of the loan. Your books should carry the note as an asset at its remaining balance and that balance should agree with the servicer's payoff figure every month. That agreement is the actual work.
Other things that land in the ledger. If the servicer collects taxes and insurance, that escrow money isn't yours and shouldn't touch your income. Late fees and servicing fees each need their own line. If you bought the note for less than its face balance, the difference between what you paid and what you'll collect gets recognized over time rather than all at once, and how that's handled on a tax return depends on the type of note and is a question for a licensed tax preparer.
The scenario that turns this from twelve deposits into real bookkeeping is a borrower who stops paying. Interest keeps accruing on paper while no cash arrives, so your books and your bank statement stop agreeing, and if you eventually take the property back the note asset has to come off and a real estate asset has to go on at some value. That's the point where people who never set up the note properly discover they can't reconstruct the balance.
The part that stopped me cold when I looked at this was that the deposit isn't income. A $1,100 payment might be $760 interest and $340 principal, and only one of those is income while the other is your money coming back. I still don't fully follow how you're supposed to know the split if the statement just says "payment received."
So if the borrower stops paying and you end up owning the house, does the bookkeeping just become normal rental bookkeeping from that day? Or is there something carried over from the note side that follows it? I went back over @rena-guide's last paragraph twice and I think the answer is the value you record the house at is the loose end.
Before you worry about any of that, pull your note document and put the payment date and rate next to what the servicer statement actually shows. On the first one I looked at, the statement was applying payments as of the received date and the note said due on the first with interest accruing from the first, which changes the interest split by a few dollars a month. Small money, but it means the servicer's running balance and the balance you'd calculate from the amortization schedule drift apart, and by year three nobody can tell which one is right. That reconciliation @rena-guide describes is the whole reason to bother.