Bookkeeping prevents your company from facing penalties from the government. Moreover, proper bookkeeping tracks your money, and you know where every dollar went. The importance of bookkeepers in real estate business cannot be overstated – especially for new real estate companies. In this blog post, we will share our tips for bookkeeping for new real estate investors. If you want to track your money, bookkeeping is your way to go. Don't worry if you have poor accounting skills. Bookkeeping is easy, and you can master it in no time.
Benefits of Maintaining an Accounting System
Before we share our bookkeeping tips, it's crucial to understand the importance of bookkeeping. After all, knowing where your money is going isn't the only reason for bookkeeping. Proper accounting systems and accurate bookkeeping can help your real-estate business in the following ways.
1. How much cash your real-estate business is making
2. Keep track of best-performing rentals
3. Analyze the market and make educated decisions to hold or buy a new property
4. Keep track of your NOI and CAP rate
5. Use historical data to make future investment strategies
6. Highlight all capital expenses to minimize cost
Important: Real-estate bookkeeping is more than tracking your money. It helps you steer away from government penalties and keeps you financially aware of your investments.
Two Common Question About Real Estate Bookkeeping
Bookkeeping is like building a house. You need a solid foundation to kick-start your accounting records to ensure things run smoothly. Here are our bookkeeping tips.
Open a Business Account
Investors with less experience commonly ask the question, "Do I need a separate account for my investment?". A short answer is, "Yes!" You need a business bank account. A business account will keep your personal finance separate from your investment earnings. It'll save time, and you'll have better knowledge about your finances. Mixing your investment earnings with your earnings will only confuse you and your bookkeeper.
Different Properties Different Accounts?
Not long ago, investment experts would suggest opening different accounts for your different properties. The experts suggested this step because it made making and tracking transactions easier. However, as your portfolio grows, this idea becomes impractical. After all, you can't manage 10 accounts for 10 different properties. Nowadays, accounting software can track your payments and account transaction even if you have one business account for all your properties. However, you might need a different account for each property if you hold an LLC. Ask your lawyer or CPA about this for more information.
Rules for Bookkeeping in Real Estate Business
Using a business account creates a solid foundation for your business and prevents the government from auditing your personal account. Here are our rules for bookkeeping that will protect your personal assets and finances.
Keep Your Personal and Professional Earnings Separate
Everyone has a side gig. It helps us pay for additional expenses. For business owners, their personal earnings are what they draw from their company as a salary. The rest of the income from the business is and should be kept in a business account. Not simply because it helps you in bookkeeping, but it also prevents a government audit. If you have a personal account for your business transactions, your account will be considered a commingling.
If your properties are sued, the government will freeze your personal account and take every dollar from your personal finance. However, if your business and personal accounts are separate, the government cannot touch your personal earnings. Because you declared that you draw a salary from your business and your real estate company is an artificial person.
That's how LLC (limited liability company) work and protects your personal finance from a lawsuit.
Categorize Expenses
So you separated your personal and business account, that's great! But you need to categorize your expenses before you steer clear from a government audit. Categorizing expenses helps in keeping track of your money, best-performing property and strategy making.
But, expense categorization also helps in assessing your taxable income. When you cut down expenses from your income, your taxable income reduces as you have to pay less tax every year. If you don't categorize your expenses from the beginning, your won't know which ones to deduct from your income.
Use Technology
Automated bookkeeping is faster, easier and more accurate than manually recording every transaction. Most software will keep digital copies of your receipts to help you categorize expenses. Using technology in real estate bookkeeping saves time and effort. You'll have to type the necessary information, and the accounting software will automatically save your information. Moreover, some accounting software can tell you taxable income if you subtract expenses from the get-go. This information gives you an idea of how much money you are supposed to pay to the government and protect your business. So it's best to trust technology because thousands of real estate businesses are doing it.
Re-check or Reconcile Your Documents
Reconciling your transactions allows you to double-check your transactions. It shows if you missed anything and where the money went during the month. Manually reconciling your accounts can be a difficult process since accounting software can reconcile better and faster. Some accounting software automatically reconciles finances every month, and you don't have to do anything.
Aim to reconcile your documents every month without fail because you don't want to miss any transactions. Missing finances in the balance can raise red flags for the government. If your business is audited, you might be in trouble for not mentioning the $10,000 that your business made a few months ago.
Ending Note
Separating your personal and business finances prevents you from losing your personal assets. In an LLC agreement, you declare that your company is a separate entity. Therefore, you draw a salary from your business. That's how you can protect your personal assets if you are sued. However, separating your bank accounts isn't enough to maintain accurate accounting. You'll need to keep copies of your receipts, categorize your expense and reconcile your document every month to know where your money is going. Keeping track of your finances will help you minimize costs and develop effective real-estate investment strategies.
