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Real Estate Accounting 101: A How-To Guide

Key Takeaways

  • Investors should care about real estate accounting because it is a tool that allows business owners to analyze their financial health.
  • Before getting started, get to know how real estate accounting software, spreadsheets and bookkeeping all work together.
  • Consider incorporating some real estate accounting principles and tips as you get started.

Have you been thinking about creating a system for your real estate accounting, but keep procrastinating on it? Do you feel like you could better spend your time on other profit-making activities? Read on to find out just how important accounting for real estate investors is, a crash-course on how it works, and some of the best real estate accounting software available on market.

Why Should I Care About Real Estate Accounting?

One should care about real estate accounting as it is an invaluable tool that helps entrepreneurs manage their businesses effectively. Perceived by many as a tedious task that eats into time that could be spent on profit-making activities, real estate investment accounting is often pushed to the wayside. Nonetheless, it is important for entrepreneurs to understand how their financial transactions are managed, especially when dealing with large sums. Real estate accounting is a crucial activity that allows business owners to analyze the health of their operations, deal with taxes more effortlessly, and better devise business strategies.

For starters, keeping up-to-date on financial records allows for the calculation of key performance indicators, which help to measure any progress made towards goals and benchmarks:

  • Cash flow
  • Profit and losses
  • Net worth

Next, investors will find that accounting will prove to be a tremendous boon during tax season. Every year, individuals and businesses across the nation scramble to dig up information and documents required for filing taxes. By keeping detailed records, businesses can prepare annual tax returns without the often-associated stress. Here are some added benefits brought about during the tax season:

  • Cut down on hours billed by your CPA
  • Have records neatly organized in case of an IRS audit
  • Keep track of and defend any deductions claimed

If you are not yet convinced on the importance of accounting for real estate investors, perhaps this next topic will. If not for accounting and bookkeeping, what evidence and data will you use when devising your business strategies? Meticulous record keeping provides entrepreneurs with the evidentiary information needed to form strategies, such as how to improve upon past years’ performance. Here are some other areas in which real estate accounting will prove to be insightful:

  • Compare year-over-year growth
  • Identify properties that are performing well or poorly
  • Provide performance data to help raise capital

If for anything, proper record-keeping at the most basic level will help business owners understand how much cash is on hand at any given time, pay bills and invoices in a timely manner, as well as stay on top of upcoming expenses. However, those who invest the time to set up a proper accounting and bookkeeping system will be able to reap the most benefits.


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Real estate accounting software

Real Estate Accounting Software, Spreadsheets & Bookkeeping

Most business owners keep track of their financial activity by using a system of spreadsheets and supporting documents. Real estate accounting spreadsheets are commonly referred to as “books,” which are ledgers that record each and every financial transaction. These real estate accounting books can be separated by category, while transactions typically include purchases, sales, receipts and payments.

The act of recording each of these transactions is referred to as bookkeeping, which also includes organizing and maintaining documents to support each transaction. These documents include invoices, receipts, statements and tax return documents, to name a few.

You might imagine how recording every single transaction, as well as managing documents to support each transaction, will get increasingly difficult as a business grows. Many business owners take their bookkeeping to the next level by making use of real estate accounting software. According to PC Mag, some of the best software systems for small to medium sized businesses are:

  • QuickBooks
  • Wave Accounting
  • AccountEdge Pro
  • FreshBooks
  • Zoho
  • Sage
  • Xero

Many of these software systems offer mobile access and document management, and some even include modules to manage time tracking, payroll, and inventory tracking.

Accounting For Real Estate Investors With LLC’s

Most real estate investors take the time to set up an LLC to limit their personal liability, as well as to establish themselves as a legitimate business. Investors should understand that operating a legitimate business should include a proper accounting system. Not doing so can compromise liability protection, or even jeopardize the entity’s status. Investors might spend quite a bit of time reading real estate accounting books to learn the principles of accounting, but there is one overarching rule that is the most important to remember. This rule is an equation, which is as follows:

Assets = Liabilities + Equity

When recording all transactions, an accountant’s primary goal is to ensure that the books are properly balanced. This means that when all entries have been recorded, all liabilities and equity combined should equate to the entity’s total assets. If not, the accountant then knows that an error has occurred somewhere in the books. In this case, assets are any resources owned by an entity, and can include line items such as cash, investments, property and supplies. Any current financial obligations, such as invoices or credit cards to be paid, are called liabilities. Any remaining assets that can be claimed by the owner is referred to as equity. Luckily, accounting software makes account balancing easy, where the accountant only has to record transactions. However, it is still important to understand how the golden rule in accounting works.

Real Estate Accounting Principles & Tips

Implementing a very basic accounting system while you are first getting started is completely understandable. Accounting systems will naturally become more robust with time as business owners learn from past mistakes and gain experience. However, investing the time early on to build up these accounting systems can help you save both time and money down the line. Here are some real estate accounting principles and tips to consider as you get started:

  • Go digital: Earlier, we discussed the concept of record keeping. Each and every transaction on the ledger should be backed up with some type of evidence. Make use of technology, such as a portable scanner or smartphone application, to help you scan receipts on the spot. Going digital can provide a peace of mind in case any receipts are lost, or knowing that you have evidence on file in case of an audit.
  • Use a cloud-based accounting program: Cloud-based accounting software can provide you with access to your financial data at any time and at any place, as well as share access across your team. In addition, applications (such as your document scanner) can be linked up to your platform to allow for cross-functionality.
  • Open a new bank account: Business owners should without a doubt have bank and credit accounts that are separate from their personal ones, but can take this a step further by having a separate account for each of the properties they manage. This way, it is much easier to trace back debits and credits on the books to a specific property.
  • Know how debits and credits work: Speaking of debits and credits, these are terms that will come up time and time again in accounting. Although confusing, a debit is an entry that either increases an asset account or decreases a liability account. Conversely, a credit either decreases an asset account or increases a liability account. It might be easier to wrap your head around this by thinking about how a credit card statement works, as opposed to a debit card statement.
  • Hold a monthly review meeting: Reviewing your books on a monthly basis will allow you to review transactions and statements, to make sure there are no errors or any outstanding payments (either to be made or to be received.) If you are using accounting software, you should be able to download analytics reports to measure progress made toward financial goals as well.
  • Consider outsourcing: It may be tempting to manage your company’s real estate accounting yourself to cut down on costs, but outsourcing this task should be given careful consideration. You can either hire an accountant, or outsource to a CPA firm that provides accounting services.

Real estate accounting is an essential activity for investors who hope to stay on top of their finances, analyze the health of their business, and even identify which of their properties are performing the best (or worst.) This process might seem tedious, but can actually be made much easier by setting up an automated system as soon as possible. Getting started sooner than later will allow you to measure the current financial status of your entity, as well as set benchmarks and goals to help your business thrive.

Do you have an effective real estate accounting system in place? Is so, what are some of your favorite applications and tools? Feel free to share in the comments below:

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