As an investor, it can be difficult to remember that real estate is essentially a business. All too often, investors get caught up in the front-end rehabs and wholesales. However, tasks can compound rather quickly. Between generating leads and trying to get deals closed, following through with day to day operations can get overwhelming. Subsequently, there is an entire back-end to the real estate business that needs to be addressed on a consistent basis. Having said that, the point of any investing business is to generate income. It is how you manage said income that will determine the success of your business. Therefore, a strong grasp on the accounting process is absolutely critical to any investor that is serious about increasing their bottom line. Real estate accounting should be considered an important part of your business.
There is a lot that goes into running any business. There are plenty of tricky formulas and calculations that can be used to gauge the profitability of a business, but the simplest question to ask is whether or not you are bringing in more than you are spending? If the answer is no; the number of properties you are closing doesn’t really mean anything. You need to look at where your money is going and where you can sharpen your pencil. Many inexperienced investors will attempt to do their own accounting on every property without any real grasp of the concept. It is impossible to know how well your business is doing if you do not know every dollar that goes out the door.
It can be intimidating and quite tiresome to go through every business expense, but necessary nonetheless. Take a day whenever you can to go through every single bill and expense you have. What you will find is that there are most likely numerous areas that you are overpaying in out of convenience or habit. Maybe you have used the same oil company or marketing service for years and never really checked the bill. Have the quarterly water or sewer bills at your rental properties increased sharply over the last few years? Did the price of the dumpsters you use for your demos go up since you last looked? It is not cheap to try to save $50 or $100 here and there. If you do this with three or four expenses over the course of a month, you could be looking at saving thousands a year.
In addition to business expenses, it is also important to look at your personal spending habits. If you are spending money as quickly as you make it, your business will become weaker. Personal habits have a tendency to leak into business habits. It is a gratifying feeling to walk away from a closing with a large check, but that doesn’t mean you should treat it like Christmas. You need to reign in your spending until your business is strong enough that leads will continue to come in. You can certainly treat and reward yourself for your hard work, but do it in moderation. Personal spending habits can derail even the most successful business.
The flip-side of breaking down expenses is trying to find ways to maximize revenue. This can mean looking at any rental properties in your portfolio to see if you can increase your rents across the board. It can mean looking at realtor commission plans or contractor rates and seeing if they are in line with the work that is being done. This doesn’t mean neglecting to pay for good service, but it does mean you can shop around to get the best deal. Much like the savings on expenses can add up, so does increasing your revenue. Individually it may not amount to much, but in conjunction with every other area it really does make a difference.
Looking at the interest rates of any mortgages and credit cards you have is also a sound strategy. It is not that difficult to find a zero interest credit card nowadays. There is no reason you should be paying a high rate if you have an excellent payment history. By transferring your high balance and high rate accounts to a zero interest one, you can save hundreds of dollars over the course of the year. The same applies to your mortgage rate. You may have got your mortgage a few years ago and forgot about the rate or the private mortgage insurance payments you are making. It is certainly worth investigating what your refinance options are to see if there is any way to lower the payment. You can also look at any expenses to see if there are deep discounts in paying for services in advance such as lawn maintenance, snow removal, oil delivery or even property management services.
Your bottom line is the most important part of your investing business. At a minimum, you should treat it like you would your household budget and have a firm grasp and every expense that goes out and every dollar that comes in. There are thousands of dollars that go unaccounted for every year by investors that don’t stay on top of their business. Closing deals and getting checks is nice, but if they are going right out the window you are constantly chasing your tail. It may sound simplistic, but generating more income than expenses is what business is all about.