Real estate is a challenging but exciting business that requires knowledge, talent, and organization to succeed. Most real estate investors are ecstatic about buying and selling properties. The deals keep the heart pumping. Good real estate accounting practices are essential to ensure your financials are in order and to measure progress against cash flow, net worth, and profit and loss benchmarks. However, if you want to profit as a real estate investor, you need to keep a close eye on your financials.
Real estate accounting isn’t fun, but it’s critical. It helps you measure your progress against cash flow, net worth, and profit and loss benchmarks. It enables you to understand which properties are performing well and which are performing poorly. Good accounting also keeps your books in order so that you can borrow money if you need to take advantage of an opportunity quickly. It also makes filing your taxes more accessible and can help you maximize your deductions.
Here are some of the best real estate accounting practices for real estate investors.
Follow Government and Industry Regulations
Government and industry regulations for real estate accounting can be tedious, but you’ll need to follow them to stay out of trouble. Regulations also change frequently. Most real estate investors don’t want to spend much time dealing with this banal task. Consulting with tax professionals and hiring a real estate accountant familiar with government and tax regulations will keep you in good standing without taking you away from the exciting tasks of making deals.
Develop a System
Having a robust accounting system in place is foundational to your business. That system consists of processes and software. First, develop a process for filing receipts and documents, keeping records, invoicing, and payment processing. Consider using digital technology so that you can scan receipts immediately. Put your processes in writing so that everyone on your team is clear about them.
The second part of developing a system determines what accounting software you’ll use. Various packaged software solutions are available; the best ones depend upon your needs. A real estate accountant can help you make the right choice.
Develop a Tax Strategy
You don’t want to lose all your profits to taxes. Depending upon your jurisdiction, you may have a variety of ways to hold property. According to Money Crashers, your choices will make a huge difference in how much money you’re able to keep for yourself. Examine the options in your jurisdiction, develop a plan, and include your tax strategy in your overall business plan. Then, when investment opportunities come up, you’ll already know how you’d like to purchase and hold the property.
Real estate accounting requires superb organizational skills to stay on top of billing, collections, and bank account reconciliations. You also need to keep track of receipts and documents to have them for tax or legal purposes.
Know Your Performance Metrics and Review Them Regularly
Establish goals and then set up a monthly review routine. At each review, look carefully at your balance sheet and earnings statement. Regular reviews allow you to catch discrepancies early. They also let you determine which properties are the most profitable and find ways to cut costs to improve profitability all around. Spending a few hours each week looking at your numbers will save you headaches later.
Hire a Professional
You may think that hiring a professional real estate accountant is expensive; however, the benefits outweigh the costs. A professional real estate accountant can save you considerable time and money by implementing good real estate accounting practices. The professional will research jurisdictional regulations, help you establish a system, research tax benefits, and produce performance reports. The accountant will keep you and your business organized to avoid any compliance or tax problems. They can also advise on the best accounting software and will know how to use it. A professional real estate accountant can do the tedious work for you to focus on buying and selling properties.
A real estate virtual assistant specialising in accounting can provide the benefits of a real estate accountant but at less cost than hiring a staff person. Hiring an offshore virtual real estate accountant can be even more cost-effective. For example, virtual real estate assistants in the Philippines are highly trained and professional but available at lower rates than virtual assistants in many other countries, such as Australia and New Zealand.
Real Estate Accounting Practices Key Takeaways for Investors
Good, organized, accurate accounting is critical to your success as a real estate investor. However, it’s tedious and probably not how you as an investor want to spend your time. A virtual real estate accountant can save you money and keep you on track.