When it comes to real estate accounting, there are a lot of moving pieces. But if you want to be successful as an investor, you need to have a firm grasp on your finances. That’s why we’ve put together this guide on the 10 steps to successful real estate accounting.
We’ll walk you through everything from setting up your bookkeeping system to tracking your expenses and income. So whether you’re just starting out or you’ve been investing for years, this guide will help you stay on top of your game!
The Goal Of Real Estate Accounting “Bookkeeping”
The first step to successful real estate accounting is understanding the goal of bookkeeping. In a nutshell, bookkeeping is all about tracking the money that comes in and goes out. This means keeping track of your income and expenses, as well as any other financial transactions that take place in your business.
Your income and expenses will include things like income from rentals, expenses like repairs and maintenance, and capital expenditures like purchases or improvements. This information is essential because it gives you a clear picture of your financial health.
Why Organized Books Are Essential
Organized books are essential for two main reasons: they help you make sound business decisions and keep you compliant with the law.
Let’s start with the first reason: making sound business decisions.
When you have a good handle on your finances, you can make informed decisions about where to invest your money. You can also avoid making costly mistakes, like overspending on a property or taking out too much debt. A sound bookkeeping system will help you track your progress and make sure you’re staying on course.
The second reason organized books are essential is that they keep you compliant with the law.
You’re subject to several laws and regulations as a real estate investor. And if you don’t stay compliant, you could face severe penalties, including fines or even jail time. One of the best ways to ensure you’re compliant with all local and national laws and regulations is to consult with a CPA.
Bookkeeping Systems Are Divided Into Two Separate Buckets: The Books and The Supporting Documents
Now that we’ve covered the basics of real estate accounting, let’s talk about how bookkeeping systems are divided into two separate buckets: the books and the supporting documents.
The books are where you track your income and expenses. This is typically done with accounting software like QuickBooks or FreshBooks. The books will also include any other financial transactions that take place in your business, such as loans or investments.
The supporting documents are the receipts, invoices, and other documentation supporting your bookkeeping system entries. This might include things like rental agreements, repair bills, or bank statements.
While it’s not required that you keep both sets of records, we recommend doing so for two reasons: it will make your life easier come tax time and give you a complete picture of your finances.
The Ten Steps To Successful Real Estate Accounting For Investors
Now that we’ve covered the basics of real estate accounting let’s get into the nitty-gritty with our ten steps to successful real estate accounting for investors.
Step One: Choose The Right Accounting Software
The first step is choosing the right accounting software. This is arguably the most crucial decision you’ll make when it comes to setting up your bookkeeping system, so take your time and do your research.
There are several different options on the market, so it’s essential to find one that fits your needs. If you’re a small investor with simple finances, you might be able to get away with using a basic program like Excel or Quicken.
On the other hand, if you’re a more prominent investor with more complex finances, you’ll need something more robust like QuickBooks or FreshBooks.
No matter which software you choose, make sure it’s easy to use and that you’re comfortable with it. The last thing you want is to set up a system that’s so complicated you never use it.
Step Two: Set Up Your Accounts
The next step is setting up your accounts. This part is pretty simple: you’ll need to create an account for each income and expense category in your business.
For example, if you’re a rental property investor, you might have accounts for things like rent, repairs, and property taxes. If you’re a fix-and-flip investor, you might have accounts for materials, labor, and interest expenses.
The key here is to be as specific as possible. The more detailed your accounts are, the easier it will be to track your expenses and income.
Step Three: Record Your Transactions
Once you’ve set up your accounts, it’s time to start recording transactions. This part is fairly straightforward: you’ll log your income and expenses in the appropriate account. Using accounting software, you can import your bank and credit card statements. You’ll need to manually enter transactions if you’re not using software.
Either way, it’s crucial to stay on top of your transactions and record them in a timely manner. The sooner you record a transaction, the easier it will be to track your finances.
Step Four: Review Your Accounts Regularly
Now that you’re recording your transactions, it’s important to review your accounts regularly. This will help you catch any errors or discrepancies in your bookkeeping system.
Reviewing your accounts at least once a month is a good idea, but more frequently is better. You can do this by logging into your accounting software or by simply pulling up your account spreadsheet.
Step Five: Keep Detailed Records
As we mentioned earlier, keeping both sets of records: the books and the supporting documentation, is essential. This might seem like a lot of work, but it will pay off in the long run. The last thing you want to be doing at tax time is scrambling to find all of your paperwork.
If you’re unsure what supporting documentation to keep, we recommend keeping any receipts, invoices, or bank statements related to your business.
Step Six: Classify Your Transactions
Classifying your transactions is another essential part of real estate accounting. This simply means categorizing each transaction as either an income or an expense.
This might seem like a no-brainer, but it’s surprisingly easy to get wrong. For example, many investors mistakenly classify their mortgage payments as expenses when they’re actually loans that need to be repaid.
It’s important to take the time to classify each transaction correctly so you can get an accurate picture of your finances.
Step Seven: Understand the Difference Between Cash and Accrual Accounting
There are two main types of accounting: cash accounting and accrual accounting. Both have their advantages and disadvantages, so it’s important to understand the difference between them.
Cash accounting is the simpler of the two methods. With cash accounting, you only record transactions when they’re paid for in cash. This method is best for small businesses with simple finances.
Accrual accounting is a more complex method. With accrual accounting, you record transactions when they occur, regardless of when they’re paid for. This method is best for businesses with complex finances or companies that deal in products or services that take time to be delivered.
Step Eight: Choose the Right Accounting Method
Now that you understand the difference between cash and accrual accounting, it’s time to choose the right accounting method for your business.
If you’re a small investor with simple finances. Accrual accounting is probably a better fit if you have complex finances.
The most important thing is to choose a method that makes sense for your business and stick with it. Consistency is critical when it comes to real estate accounting.
Step Nine: Hire an Accountant (If Needed)
Hiring an accountant is not required, but you should consider it if you’re not confident in handling your own bookkeeping.
An accountant can help you keep track of your transactions, prepare for tax time, and ensure you’re using the best accounting method for your business.
If you decide to hire an accountant, choose one specializing in real estate accounting. This will ensure they have the knowledge and experience necessary to meet your needs.
Step Ten: Create Accurate Reports
The final step in real estate accounting is creating accurate reports. This step is vital because it allows you to track your progress and identify areas where you can improve.
There are a number of different reports you can create, but we recommend starting with a profit and loss statement and a balance sheet. These two reports will give you a complete picture of your finances.
Once you have these reports, you can start to look for trends and identify areas where you need to make changes. For example, if your profit and loss statement shows that you’re spending more money than you’re making, you’ll know it’s time to cut back on your expenses.
In Closing
The bottom line is that real estate accounting doesn’t have to be complicated or time-consuming. By following these steps, you can set up a system that works for you and your business. And if you need help, don’t hesitate to reach out to a professional accountant.
Real estate accounting is an integral part of being a successful investor. By following these steps, you can set yourself up for success.
