This post was originally published on December 19, 2014. But we have improved it with updated research, content, and images.
Real estate investors come from all different walks of life. While some may have a background in finance and real estate, others are more comfortable with technology and the trades. Whatever your background is, you need to have a good grasp on where your money is going. Negligence doesn’t favor any investor, regardless of where they come from. Business finances, however, can be a difficult aspect of the investing world that not many are familiar with. Between terminology and the complex nature of numbers, accounting can get pushed to the side. That said, you need to address your finances. Proper real estate bookkeeping is one of the most, if not the most, important factors of your business. If you want your company to grow and run smoothly, you need to stay on top of finances – business and personal.
Personal financial literacy – and the best way to go about real estate bookkeeping – are two of the most neglected topics in our country. With the way bill paying has evolved, fewer people – especially young adults – do not know how to balance a checkbook – let alone run a business. Fortunately, the first step in improving your finances is an easy one: learn as much as you can about them. This means reading, watching the news, or attending as many educational events as you can. It may seem like a foreign language at the beginning, but many of the concepts are really quite simple. Investing in the stock market or overseas markets can become a blur, but basic principles are relatively easy to comprehend. It may be difficult to accept that you don’t know as much as you would like, but you are never going to learn about the business and your finances unless you do something about it.
You should commit just 30 minutes a day to reading or watching something about finance. This doesn’t mean you have to wake up every morning and watch CNBC, but even a generic finance article will help. You will find that once you start to dig in, finance is really quite basic. In a nutshell, it is all about expenses in your relation to what you are bringing in. If your expenses exceed your income, you are in trouble. In big business, raising or reducing costs by just a few cents can equal millions of dollars. In your business, or in your household, there are probably hundreds of dollars you can shave off your expenses every month. You just need to know where to look.
A good exercise to track your spending is to use a dedicated debit or credit card on all expenses for 30 days. If you use this for everything, from coffee to rehab materials, you will get a true idea of where your money is going every month. At the end of the 30 days, you should sit down and review what expenses were used to grow your business and which were essentially a waste of money. You can use this to pay any and all bills you have as well. There are many expenses in business and personal life that we make solely because we have been doing it this way for a while. Little things like looking at a cable bill or consolidating credit card debts can greatly reduce a monthly payment. Doing this on one card will not move the needle, but making several moves can change the direction of your financials.
Proper bookkeeping requires a plan of attack. However, you need to be willing to stick to it. It is one thing to have a list of items you are going to pay after a closing, but another thing to actually do it. Once you get a check and have the money in hand, it is tempting to deviate from any plan. There is a certain degree of discipline that is needed when running a business. Instead of looking for short term satisfaction, you should stop and think about the big picture: reducing debts and adding equity. It sounds simple enough, but you should always think of what you are really getting for each expense. This isn’t to say that you shouldn’t reward yourself for a job well done, but you can’t do this on every deal.
It is almost impossible to be a successful investor if you don’t know where your money is going or coming from. You don’t need to be a financial wizard, but you should have a basic understanding of debits, credits and all expenses. If you just glance at your books once a month, you very well could be throwing away money. Knowing what is going on with the numbers can be boring, but it is the only way to really know what is going on. By taking the time to educate yourself and spending a few minutes a day staying on top of your numbers, you will make your finances work for you.
With the improvements in today’s technology, real estate bookkeeping has gotten substantially easier to do the help of online resources. If the idea of managing your accounts by hand intimidates you, consider an accounting system like Xero Online Accounting, Sage 300, or Intactt – all highly recommended by other real estate investors. By law, it is required that businesses keep up to date and standardized records of all money going in and out of their company. Online bookkeeping keeps a more accurate track of daily expenses so that you have one less thing to worry about – similarly to the way a virtual assistant would be helpful.
Organization is KEY to the bookkeeping process, which is why online tools are more beneficial. Especially with complicated real estate transactions, it is best to capture as much information about the deal as possible then let your computer do the sorting. 90 percent of entrepreneurs fail and – as you are probably aware – poor accounting is a primary reason. Don’t allow yourself to fly blind, switch to paperless accounting today.