Let’s jump back in time and think about Super Bowl 50. The crowd was on the edges of their seats; it was the moment they have all been waiting for. You could feel the excitement and tension in the air.
The Denver Bronco’s Peyton Manning was leading his team down the field. He dropped back to pass the ball, heaved it into the air, and his receiver caught the ball in the end zone with one hand!
It was an incredible moment! The crowd went wild and cheered in excitement!
But after that – nothing happened.
The scoreboard stayed blank. No points were added. Were the Broncos awarded a point? Or were the Carolina Panthers the ones who got it? Nobody knew!
All the spectators were watching the game on the TV waiting for the ‘tail of the tape’. It appeared as if the Broncos played better, but who had gained more yards? And what about turnovers and first downs? Most importantly, what was the score and who was the Super Bowl Champion?
If no one kept the critical statistics of the game, the Broncos could say they killed it out there, but could they actually PROVE whether they won?
OK OK OK! I know it sounds ridiculous. But every time I think of that game, it reminds me of some real estate investors.
Many investors play the real estate game, but they don’t keep their statistics in check. And by statistics, I mean knowing how each of your properties are performing every month. As Warren Buffett once said, “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”
The way to know if you are losing money on your investment properties is through proper bookkeeping and other accounting related practices. Accounting practices are the financial systems and processes implemented to track and that ultimately allow you to analyze your business financial results.
This article was written to provide you ten critical tips to implement that will provide your real estate investment properties with consistent and reliable accounting practices. If you choose to follow them, the chances are that you will become a double threat – an investor who not only closes deals and makes sales, but also keeps their finances in check – becomes that much greater.
Good accounting practices will help you increase efficiency and organize your real estate financial operations. Other benefits of using these practices are that you will ultimately save money, reach your goal of financial independence (or at least give yourself a better chance), and take control of your real estate accounting.
Here are the top 10 practices successful real estate investors follow all over the world.
Even though it is something very common, the importance of implementing an accounting system can never be ignored. If you feel like you can create your own software package that is tailored according to your needs, you can reach out to software vendors and get one crafted for yourself. However, if you feel you could use a system already existing on the market (which we HIGHLY suggest), you can move ahead with a software provider like QuickBooks or Xero, to name a couple. Both accounting software providers have robust marketplaces that allow for increased automation and simplification of managing your business financials.
Overall, it doesn’t matter which system you use because, in the end, its purpose is to make things easier for you. Another benefit of using an accounting system for your investing business is that you can let someone else manage your financials for you, while you close deals and drive the business forward!
If you ever need help setting up or managing your real estate accounting processes, we are always here to help at REA.
Most successful real estate investors have multiple bank accounts. They also use trusts and LLCs to guard themselves against all sorts of liabilities. Creating business bank accounts and opening business credit cards is another practice most investors recommend. By using this strategy, you get to draw a line between personal and business activities. Another benefit of adopting this practice is that it allows you to track your transactions with ease. Separate bank accounts (and ideally credit cards) should be opened for each LLC and thus property you own.
Accounting is all about maintaining records. What good is it to you when you can’t find a vital receipt? Most investors use folders (online highly preferred) to keep their receipts. Create a simple spreadsheet, enter dates, amounts, and details about a particular expense. Once the records are uploaded, scan the receipts electronically – you can even do this from your phone. By implementing this practice, you will thank yourself when tax time rolls around.
Here at RealEstateAccounting.co, we specialize in leveraging technology to help our client’s setup processes to help automate the indexing of receipts.
You don’t want to be going through your records only to find strange charges you don’t recognize. To avoid these situations, we recommend you perform monthly reviews of our income statement. Similarly, review your investment’s overall financial standing (e.g. balance sheet) on a monthly basis to stay on top of assets and liabilities and in particular your cash balance. We recommend setting up a standard process with your real estate bookkeeping to have your financials completed at the same cadence every month.
Some investors with smaller portfolios can do their own accounting. However, as you scale the number of properties or size of properties you are acquiring, it is highly likely you will need to outsource given the time commitment. As a real estate investing business owner, you need to learn how to hire a hardworking and committed CPA or another accounting professional to take care of your accounting needs. This will allow you to get more done and focus on revenue generating activities.
If you are ever interested in a free consultation about outsourcing your real estate accounting, please feel free to contact us here and one of our bookkeeping specialists will be in contact within 24 hours.
As an investor, you need to understand the flow of money – where is it coming from, and where is it being spent. Knowing your finances will give you confidence when it comes to deal analysis, as being closer to the details will allow you to know what deals are acceptable and which are not.
As mentioned earlier in the first heading, you need to implement a system. Software has come so far, so at this point, it is unacceptable to not have an accounting software package (Quickbooks, Xero, etc). Furthermore, there are additional apps like Bill.com and Expensify will make your bookkeeping even more streamlined. We highly recommend you implement these or similar technologies to not only make your life easier, but to allow real-time insight about each of your properties no matter where you’re physically located.
While accounting is helpful on the financial front, it can also have a significant impact on actual business performance. If your accounts are well kept and labeled appropriately, you can extract key information to make future successful business decisions about your real estate. You will know (in detail): how an investment property is performing, average revenue generated from an investment property, how much debt is owed, occupancy rate, and may other use key performance indicators. This is critical data that will not only help you close more deals, but will also allow you to become better at extracting the most profit out of your investment properties.
Errors can cost you a lot (in both time and money) over the long run in real estate. Most errors should be caught immediately during your monthly review process when done properly. As with most things in life, errors are bound to happen. But if you implement predictable, consistent, and timely real estate bookkeeping practices, there is a higher likelihood that you will ‘smoke out’ errors as quickly as possible, which will help lessen the impact on the bottom line.
Real estate investors with smaller portfolios can look at their KPIs (key performance indicators) on their own. Similarly, accounting contracts that have been outsourced can also be viewed by a single person. If, however, you have a whole team taking care of your accounts, managing invoices, and sending in payments to contracts, then you need to run audits every once in a while. You won’t need to do this for a while, but since we know how motivated each of every one of you are, we thought we should mention it.
As an investor, consistent and reliable real estate bookkeeping will help you stay on the right path to financial success. Accounting and sound business practice go hand in hand, and one is considered incomplete without the other. By adopting the above-stated practices, you will gain confidence that will permeate throughout all facets of your business.
Monthly, consistent bookkeeping is all too often an after-thought for many real estate investors when it should be the foundation of your business. If you have both the time and confidence to implement the above accounting practices, then by all means please do so.
However, if you are like most people and would rather spend time on revenue generating activities, then we suggest you outsource this to an expert real estate bookkeeper that understands the needs of real estate investors.
To your success,
Mark and Adam
Co-Founders @ RealEstateAccounting.co