You are really good at finding deals, but without proper accounting how do you know how each of your deals is going to perform?
How do you know your top performers vs. the slackers in your portfolio? How do you know whether your flip is within budget and where adjustments need to be made? Proper accounting is a fundamental part of owning ANY business. YES, that means YOUR real estate business too! As a new year approaches, it is valuable to explore some game-changing accounting strategies that real estate investors should be mindful of as they grow their business:
1. Do you have an accounting system?
No, you don’t need anything fancy to get started. While many real estate investors usually get started using Excel, there are many cloud-based accounting systems in the market such as Quickbooks Online and Xero that real estate investors can use to keep their books. Look for free trials to get familiar with them as they are readily available. These accounting systems usually come with templates specifically geared for the real estate industry, automation tools to help you keep track of your transactions and strong financial reporting capabilities to help you run reports to analyze your business.
2. Are you keeping track of your receipts?
You need good records to substantiate your tax returns so keeping track of your receipts is very important. Depending on the volume of transactions you are dealing with, this could become a daunting task. The key is to create a system to help you get organized! Fortunately, technology has come to your rescue! There are many tools and apps available to help you keep track of receipts. For example, Quickbooks Online lets you scan and attach receipts to transactions. Expensify lets you keep track of business expenses, track receipts and even helps you keep track of your business travel including mileage. Uploading your receipts to Google Drive or Dropbox is always an option. There are even apps like Shoeboxed where you can literally send them your pile of receipts, they will scan them for you and send you an electronic file with all of your receipts itemized.
3. Are you reconciling your books?
Many real estate investors do not reconcile their books. But what does this even mean and why does it matter? Reconciling is the act of double checking your books against statements from your bank, credit cards, lines of credits, savings, etc. This is very important because mistakes happen and unless you reconcile your books frequently you won’t be able to catch these mistakes or missing information. Incorrect or missing transactions can cost you money so you want to correct these mistakes as timely as possible. A lot of accounting software packages have the reconciliation process fairly automated to make it easier on business owners, but involvement is still required.
4. Are you keeping revenue and expenses by property and reviewing your financial statements?
Once you have entered and reconciled the transactions into your accounting system, the most important part is yet to come! Keeping revenue and expenses by property will allow you to run financial statements reports by property (profit & loss statement, balance sheet, and cash flow statement). The profit & loss statement will enable you to see how profitable each rental is and run comparisons across deals. You can also analyze how your properties are performing year over year. You will be able to see trends if for example, the expenses on a given property are increasing dramatically outside of your expectations. Reviewing financial statements will help you keep your finger on the pulse of your business, identify problems before they get out of control and make informed decisions for future projects.
5. Are you keeping your personal and business transactions separate?
If you want to save yourself some headaches, keep separate bank and credit card accounts for your business. This becomes even more important if you have an entity such as an LLC. Do not co-mingle your personal and business funds! I get it. We are not perfect and mistakes do happen. If you happen to pay for business expenses with your personal funds, please make sure you reimburse yourself. If you need to inject additional cash into your business, make sure you treat that as an owner contribution.
6. Are you accounting for security deposits properly?
Many real estate investors might not know that a security deposit is not income. If you are receiving a security deposit from a tenant, it is critical that it be treated as a liability. Why? Well, you may need to return this money back to your tenant. If any financial decisions were made based on this misnomer, you might find yourself surprised. Improperly classifying the security deposit as income may be the reason you will pay more in taxes than you have to.
Business people are constantly reviewing their numbers. It helps them determine the health of their business and where adjustments need to be made to have better control of cash flow. Life gets super busy. Trust me, I know…but you need to have a good grasp of your business financials, so you can make better and informed decision for the future.
Have additional questions? Connect with Karla Olivares on Linkedin or email her at [email protected].com.