Between clients, listings, networking, and maintaining a bookkeeping system, real estate professionals have a lot on their plate. Inefficiency in any of these areas is not good for business, especially when it comes to your books.
Your financial records are the foundation and framework of your business. They give you a behind-the-scenes look at potential red flags as well as opportunities for business growth.
If you want to run a successful business, it’s crucial to have an efficient real estate bookkeeping system in place. Here we will cover the unique aspects of bookkeeping in the real estate industry and the accounting method and bookkeeping practices that best meet those needs.
What is real estate bookkeeping?
Real estate bookkeeping involves the recording and tracking of any transactions that are used for the purpose of property management. Real estate bookkeeping is used by owners of real estate agencies, property managers who are managing property for clients, those who maintain housing association accounts, construction company managers, those who oversee investment trusts, and providers of real estate services.
How does real estate bookkeeping differ from bookkeeping for other industries?
While bookkeeping in all industries involves recording business income and expenses and keeping track of assets and liabilities, there are certain transactions in bookkeeping that are specific to real estate.
Some of these transactions include invoicing tenants for rent, receiving payment for rent, charging late fees for unpaid or late rent payments, posting tenant security deposits, managing HomeOwners’ Association fees, and tracking accrued depreciation on real estate property.
Why do real estate agents use cash basis accounting?
According to the IRS, most real estate professionals operate on a cash basis accounting method. This means that income, such as rental income, is taken into account when it is received and expenses are deducted when they are actually paid. What that means is that income is taxable when payment is received and expenses are deductible when paid, instead of when an invoice is received.
There are several advantages to the cash accounting method. One advantage is that it is a simple method to follow. It simply tracks the cash that flows into the business and the cash that flows back out of the business. When tax time rolls around, you don’t have to pay tax on any money that hasn’t been received. This is a straightforward method that gives you an accurate picture of your “in the moment” cash flow.
The cash method also allows realtors at the end of the year to push out a closing date until after the first of the year but pay as many expenses as possible before the end of the year, in order to minimize taxable income for the current year.
Real estate agents use cash basis accounting due to its simplicity and the potential for some significant tax benefits.
How is a real estate transaction posted?
When you post a real estate transaction, there should be enough information included that it makes the transaction easy to cross-reference and track through a paper trail.
For income, such as receiving rent payments from a tenant, you would have the names and addresses on file of all tenants. The payment will be posted on the date the payment is received from the tenant, along with the amount received, the payment method, the payment period, and the remaining balance due.
For expenses, the payment will be posted on the date the payment was made, along with the name & address of the vendor, amount of payment, payment method, payment period, and remaining balance due, if any.
What are real estate financial reports and how are they used?
Real estate financial reports are statements that highlight the financial information of a real estate company. The bookkeeping transactions are used to generate a variety of real estate financial reports. These reports include the income statement, a cash flow report, balance sheet, capital expense statement, rent roll, and bank reconciliation.
These reports are used to show business or property owners where their business or rental property stands financially. It also is used as a resource for prospective investors who want to know the financial background of a company.
What are the top real estate bookkeeping solutions?
There are typically three bookkeeping methods used by real estate professionals. These include using manual spreadsheets, generic accounting software, or real estate specific software.
Some real estate business owners use manual spreadsheets from programs like Numbers, Excel, Google, and OpenOffice to track expenses and income. The only time this is practical is if the business is extremely small and even at that, keeping the information constantly updated can be very tedious and time-consuming.
While generic accounting software can be more efficient than using manual spreadsheets, the software is not specifically designed for rental property. However, some of this software like Quicken and QuickBooks can be customized to meet the needs of real estate professionals if you are software and accounting savvy.
Real estate specific software is designed with real estate professionals in mind. The software incorporates features for specifically invoicing tenants, receiving & posting rent payments, late fees, security deposits, HOA fees, and tracking depreciation. After entering basic property and bank information, most software will automatically track income and expenses with intuitive features that categorize charges automatically that are specific to the real estate business.
Frequently asked questions about real estate bookkeeping
Bookkeeping provides owners with opportunities to discover ways to minimize expenses and maximize revenue. Bookkeeping sheds a lot of financial insight into the company.
By keeping track of all the transactions that flow in and out of the business, a bookkeeping system improves the flow of cash. By tracking all income and expenses, bookkeeping provides insight on how to maximize revenue and minimize expenses. Bookkeeping also creates documentation and a paper trail in case the company is ever audited.
It’s important for real estate professionals to develop and cultivate an efficient real estate bookkeeping system. The system that is best for your business will highlight areas and opportunities that will increase your income and maximize your revenue. Bookkeeping systems itemize every expense which makes it easier to spot opportunities to save money, which in turn, increases income.
An efficient bookkeeping system will also maintain an updated balance sheet with an accurate calculation of the owner’s equity, therefore, making opportunities of property appreciation easy to spot. This appreciation can be used as a down payment to buy an additional rental property. So, the most efficient real estate bookkeeping system highlights all the potential red flags and all of the opportunities for growth.
Caryl Ramsey has years of experience assisting in different aspects of bookkeeping, taxes, and customer service. She uses a variety of accounting software for setting up client information, reconciling accounts, coding expenses, running financial reports, and preparing tax returns. She is also experienced in setting up corporations with the State Corporation Commission and the IRS.
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