Overview of Accounting for Real Estate Investors
This article provides an overview of accounting for real estate investors with suggestions for how to keep your business on track.
Real estate investing can be complicated because it involves large amounts of money and many moving parts. Because of this, accurate record keeping is imperative. Even though you may see a lot of money flowing into your account after a sale or from rental income, without good record keeping, you may not know if your business is profitable or running a deficit.
You will want to be able to easily calculate the return on your investment (ROI) at any time during the life of your business, as well as the after repair value of your properties (ARV), as well as other key metrics.
Good Accounting Practices
Good accounting practices will help you know your net worth and keep track of cash flow and profit and loss. You will also be able to compare your income by year, prepare your taxes with ease, and identify which properties and business activities are making or losing money.
Accurate and organized accounting practices also will be a benefit when you are applying for a loan, paying bills, and budgeting for upcoming expenses such as holding costs and renovations, as well as make sure you don’t miss out on any deductions.
There are many allowed tax deductions for property investors, so check with your accountant about deducting such items as insurance, the purchase price of your property, labor and materials costs, utilities, property taxes, loan servicing fees, equipment depreciation, rent for office space, gas and travel expenses, association fees, continuing education, and more.
Income and Expenses for Real Estate Businesses
Real estate income and expense types vary based on the types of activities you are engaged in, such as property purchases and sales, rental income, property management, real estate broker commissions, and more.
Revenue and expenses should be organized based on the tax reporting categories of residential, commercial, or other real estate income and expenses, salary and wage expenses related to your business, advertising expenses and costs of sales, technology expenses, business insurance, professional services, dues and education. Additional expenses should also be included, such as travel, meals, entertainment, and donations, and occupancy expenses such as maintenance, depreciation, insurance, and utilities to name a few.
Accounting Software Options
While Quickbooks may be the most well-known bookkeeping software, there are numerous others available.
Freshbooks, for example, may be easier for some people to use when just starting out. It has a less complicated interface than some of the other alternatives, while still providing everything that you need to track your business finances.
Other options, such as Zoho Books, offer free tiers below a certain amount of annual revenue. Most also offer free trials to test them out before you sign up.
Based on your specific needs, budget, and familiarity with using accounting software, you should be able to find just the right fit for your business.
Here are some links to some popular accounting software for small businesses:
Accounting is not just for tax reporting, it’s also important for evaluating properties before purchase and keeping your business on track.
Professional Legal and Accounting Services
There are specialized rules that apply to real estate investment businesses when it comes to legal and accounting practices. For this reason, it’s important to have qualified advisors to rely on. Qualified accountants and attorneys will help you ensure that you don’t break any rules. This will help you steer clear of costly fines and serious legal problems.
These rules vary from one location to another, so be sure to stay in compliance with your county, city, and state.
Your accountant can also help you select the best method of accounting. This may be based on the size of your business and your business activities. (Methods of accounting include cash accounting or accrual accounting.)
If you plan to accept investment money from others for your projects, you will be subject to even more specific rules that may have serious legal consequences if not followed.
Even if you do not feel comfortable using accounting software and prefer to use Excel or even a paper notebook, be sure to put a system in place from the start. It’s important to carefully track and categorize all income and expenses for your business.
There are many spreadsheet templates available online specific to real estate investing. Make sure to verify that you are downloading from a trusted source before downloading anything to your computer.
Low Budget Options for Record Keeping
If you’re on a tight budget, you might prefer to use a free option to tally all income and expenses. Libre Office is a free and open source alternative to Microsoft Excel, and Google Sheets is another free option.
Backup Your Data
Whatever method of record keeping you choose, be sure to backup all your data regularly. This will ensure that you always have the information you need to run your business at your fingertips. Plus good record keeping will help to make tax reporting a breeze.
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