Bookkeeping: This might not be the first term that strikes our minds while trying to invest in real estate. However, real estate bookkeeping is quite necessary when it comes to owning property or managing one. It might even prove to be an essential part as bookkeeping can keep the company in the dark.
Keeping accurate books is not a complicated task but could be time-consuming. One of the most important factors that can be understood through bookkeeping is ROI, i.e., Return on Investment.
Positive ROIs in damages, maintenance bills, taxes, and mortgage payments are favorable ones in real estate bookkeeping. The positive, as well as the negative ROI factors, are included in every real estate investment. However, you should be well prepared for any unexpected error.
Understanding crucial factors and tracking them diligently can help in keeping the real estate business profitable and do effective real estate bookkeeping. A well-organized real estate bookkeeping system allows you to analyze the business property value, track the losses and the profits, prepare annual taxation, and even determine successful business plans.
Some of the best real estate bookkeeping tips for novice investors are:
Track expenses by creating a book and supporting documents
Setting up your booking and tracking expenses could be a time-consuming task. However, one can reap the benefits shortly. All the business transactions can be quickly recorded with the help of real estate bookkeeping, and this can be done with the help of an Excel spreadsheet.
In the business’s bank account, debit and credit cards can help maintain transactions and record them in the book itself.
Some of such supporting documents can be a receipt or proof of every financial transaction noted in your book. Like the book, documents like a filing cabinet, hard copies, and soft-computerized copies can also be recorded.
Keep your business and personal accounts separate
One of the critical aspects of real estate bookkeeping is to keep all accounts related to your business separate from your personal accounts. An excellent place to start is opening a separate bank account and owning a credit card in your business name.
It will help you analyze the expenses related to your business and understand the workplace’s day-to-day transaction.
Make sure your book matches your bank account
It might not sound logical, but one can be easily surprised after noticing the errors between your bank account and the book. This process is called bank reconciliation.
Bank reconciliation helps investment business double-check books and make sure that everything is recorded accurately.
In short, bank reconciliation keeps track of accurate numbers, thereby matching books with bank accounts.
Track and itemize all expenses and Income
Every real estate business needs to keep track of monthly costs and profits and real estate bookkeeping can assist in doing so. Each cost and profit transaction must be categorized correctly. Indeed, the IRS helps in defining different expense category to aid in itemization:
- Management Fees
- Auto and Travel Expenses
- Cleaning and maintenance
- Other expenses
It is important to note all expenses related to the categories listed above while doing real estate bookkeeping. By doing so, it will be easier to prove these expenses to the IRS and get them audited. However, if something that does not fit the category, those expenses can be filed under the ‘other’ category.
Generating substantial profit & Loss statement
As the books with supporting documents are created, start itemizing profits & loss, open bank accounts to track them, and bank reconciliation, it is the time to create an accurate report. To determine the business running status, reports serve as a quick reference point.
A report related to profit and loss is an ultimate spot for all expenses and incomes and even profits and losses that may have occurred as a result. Such reports are generated on a monthly, quarterly, and yearly basis in real estate bookkeeping. Ultimately, it highlights the depreciation and profitability of business very clearly.
Real estate Bookkeeping is an essential aspect of doing business in the real estate sector. Maintaining effective books serves the present needs of a business and underlines the future success goals in the form of better revenue and expenditure control.