The word “bookkeeping” is probably not the first thing that comes to mind as a real estate investor. However, real estate bookkeeping is an important aspect of managing and owning your properties. Real estate bookkeeping could even be the very most important piece since a knowledgeable bookkeeper can make sure your business remains profitable, especially during tax season. Maintaining precise books is both detailed and laborious. One of the most important ways quality bookkeeping can benefit your real estate business is in fully understanding your return on investment (ROI). Proper and comprehensive bookkeeping allows you to keep tabs on your business’s annual gain and losses, discover new business opportunities, put together yearly taxes swiftly and smoothly, review important data, and more. Here are the top five real estate bookkeeping tips for smart real estate investors.
Keep Personal and Business Accounts Separate
Interestingly enough, one of the keys to real estate bookkeeping is to keep your business expenses completely separate from your personal costs. Regardless of whether or not you’ve set-up an LLC, allowing your business costs and personal expenses to commingle is not a good idea. Why? Because if the IRS were to audit you, they would have to search through every one of your business expenses and personal expenses for proof related to your tax liabilities, and this can be a scary thing.
A wise place to start is by actually creating a separate bank account as well as a seperate credit card in the name of the property or business. This will additionally allow you to keep track of expenses more easily. You can clearly see cash flows and successfully keep track of monthly revenue, which assists you in acquiring a better understanding of your companys’ needs. You will be able to use this knowledge to produce important reports for stakeholders, as well. This will also protect you in the event of an IRS audit.
Track Purchases and Collect Supporting Documents
Tracking your purchases by setting up your own books is labor-intensive but critical to the success of any real estate investing business. If you go the DIY-route, you can do this with a generic spreadsheet, but if you have a large real estate business or do a lot of deals, this may quickly become overwhelming.
Supporting documents include proof of each financial transaction in your books. You can compile your supporting documents and books in whatever way you prefer — digital, hard copies, or a combination thereof. Whichever way you collect this information, all of your professional supporting documents should be meticulously organized. A smart way to start is to make yearly files for your bank statements, verification of your expenses, tax return files, credit card statements, insurance papers, leases, contracts, and other various property information.
Supporting documents also offer verification in the case of a tax audit by the IRS to prove that the purchases your company claimed are real. Although some investors prefer hard copies, online bookkeeping is convenient because you can keep your records up-to-date as they occur.
Record and Itemize All Income and Expenses
You should always keep detailed records of your monthly costs and income, especially in real estate. Every income and expense needs to be categorized precisely. While the IRS provides some expense categories to help with itemization, real estate bookkeeping is often more complicated. Keeping detailed logs of all income and expenses is important to knowing the overall health of your real estate investing activities. All sources of income and every expense must be recorded and proven with a digital or written record. This is where digital records can come into play; organizing your receipts can be more convenient on a mobile device like a cellphone or tablet, instead of sitting down and making a huge spreadsheet for a large number of receipts later. The truth is that waiting to work out your net profit at the very end of the month could create a higher chance of issues and errors. Ideally, it’s best to update your records as expenses occur.
One important expense to track is the total interest on loans. You should keep close track of monthly debts, changes to interest rates, payment deadlines, and time until the loan is paid off. As a real estate investor, you should absolutely keep records of any expenses for which you plan to take tax deductions. This is another area that real estate bookkeepers are experts in and can greatly assist in simplifying your life, making more time, and lowering your taxes by making sure no deductions are missed.
Reconcile Your Bank Accounts Carefully
Ensuring your books align with your bank accounts is called bank reconciliation. It’s important that real estate investors always make sure the receipts are equivalent to the actual amount taken from the account. This is a critical component of bookkeeping because it ensures that your real estate investing does not overextend itself and verifies the money coming in and out each month. Bank reconciliation helps your real estate investing business by double-checking all of your books and confirming that bank balances connect with the cashflow on your books. Bank reconciliation is basically a way to verify that all of your numbers are accurate. This type of triple-check is important to just about any smooth-running investment business because bank reconciliation identifies any issues or errors while allowing you to visualize the big-picture of your real estate investing business.
Generate Profit & Loss Reports
After you successfully setup your books, compile your supporting documentation, correctly itemize your profits and losses, open a bank account for your entity, and perform bank reconciliation, you will be ready to generate reports. Reports are basically a quick reference point to see how your real estate business is doing. A profit-loss report is an essential tool in any real estate investor’s bookkeeping toolkit.
Your official profit and loss report should always include operating costs. Your operating salary should never be mixed up with your actual net income, which is defined as the total income after your taxes and expenses. From this information, you can generate various kinds of visual reports to accurately display annual fiscal trends for your business, make predictions, and allow you to make better business decisions. You can as well learn valuable information which will eventually help to save you lots of cash in the future. There are several profit and loss reports that involve sales volume, too, or the amount of total components sold within a specific time period. These can especially be useful for interactions with potential lenders or investor partnerships.
The most successful real estate investors keep pristine books. This sets them up for tremendous tax savings and winning at tax season, but it comes at a significant time cost. The daily or weekly effort of inputting data, reconciling that data, and tracking income and expenses is time intensive. Your ROI on proper real estate bookkeeping, however, can be substantial. High-quality, highly-detailed books create the foundation that all your real estate investing’s future success will build upon. Anderson Advisors offers bookkeeping plans to fit any investor’s budget or goals, and you can trust you’ll be in the best position at tax time knowing our firm specializes in real estate bookkeeping. Speak to a real estate bookkeeping specialist today to learn more about how Anderson can bolster the success of your business.
