Real estate accounting is essential for any successful real estate investment business. If you do not have a good handle on your finances, you will be unable to keep track of how well you are doing. Staying organized through real estate accounting will help you become profitable and keep you out of legal trouble. Essentially, real estate accounting is when you keep an accurate record of all of the money that comes in and out of your business. When you have all of your financials organized and can be looked at quickly, you can make smarter decisions for your business. 

You don’t need to know anything about accounting to get started in real estate accounting for your business. Keeping accurate business records should be something you prioritize at the start of your real estate career. When you begin bookkeeping early, you get a better handle on the software and processes. Then, when your business gets larger, it won’t feel as overwhelming. Once your business grows, you may even consider outsourcing to an accountant or assistant. 

Who Should Use Real Estate Accounting?

Many different people in the world of real estate choose to use real estate accounting. That said, it is most beneficial for any investors who manage multiple properties. With a lot of money coming in and out, having a way to keep track of it all is crucial. If you manage multiple properties, you will have to track the finances for each location. It can become challenging to do this if you do not have the proper accounting system to keep it all organized. Have a real estate accounting system helps you manage your books, keep up with bills, catch inconsistencies in a transaction, and quickly identify growth opportunities. 

Why Real Estate Accounting is Important

Creating an organized real estate accounting system is essential to the success of your business. Having easy-to-read, up-to-date information allows you to:

• Manage your cash and easily reconcile with the bank
• Catch discrepancies in credit card and bank statements
• Pay all bills and other finances on time
• View which properties are performing well and which are not
• Track successes of various business strategies
• Quickly view essential performance measurements 
• Save money on tax preparations due to organization
• Easily defend all claimed deductions to the IRS
• Use data and analytics to grow business by showing past performance to lenders and partners

Tips for Real Estate Accounting

Go Digital

It is way more work and a lot less practical to keep track of your finances on paper. Digital accounting allows you to search for a transaction, create reports, and edit items very quickly. You can also take pictures of your receipts, upload them to the cloud, and easily pull them into your online reports. If your real estate accounting system is backed up by something like Google Drive or DropBox, or lives within a paid software, you never have to worry about anything happening to it. Anything physical has the potential to get damaged and destroyed. If you haven’t already made the switch, now is the time. 

Update and Track Often

Every single transaction that occurs has to get added and tracked through your accounting system. Your real estate accounting software should realistically be updated daily or every other day with any new transactions. This could include daily purchases, paid bills, bills that you received, payments you received, etc. 

Updating your expenses that often may seem overwhelming. While it may work better for you to wait a few more days in between, you should never wait too long. The longer you wait to update your real estate accounting software or spreadsheet, the more likely you are to forget something. It will also seem much more overwhelming with a week’s worth of entries than a day’s worth. It may seem like a pain at first, but getting into a good habit of updating often will help avoid errors in your tracking. Once your business becomes large enough, you can outsource all of this and not have to worry about it anymore.

Itemize Every Single Transaction

Make sure to itemize every transaction in your real estate accounting system to make things easier for you and your tax accountant. The best way to do this is to upload your receipts and fill out the memo section of your spreadsheet. It would be best to break your expenses down based on the same categories the IRS uses for the most tax-friendly categorization. These are:

• Advertising
• Auto and Travel Expenses
• Cleaning and Maintenance
• Commissions
• Insurance
• Legal and Other Professional Fees
• Management Fees
• Mortgage Interest Paid to Banks, etc.
• Other Interest
• Repairs
• Supplies
• Taxes 
• Utilities
• Depreciation Expense or Depletion
• Other

These can be broken down by each month of the year to make it easy for you to track your budget. It’s also beneficial for tax purposes.

Hold onto Receipts

The best thing you can do for your taxes and your real estate accounting sheet is keep all of your receipts. To make things easier on yourself when going back and categorizing each receipt, simply write a small note somewhere on the receipt to identify which property it’s for and the purpose of the purchase. Holding onto your receipts makes managing your books a lot easier and gives you accountability with your taxes and any IRS inquisitions. 

If you try to hold onto all of your receipts, you’re going to end up with a very large folder. What you can do instead is download an app to store all of your receipts. Apps like Expensify will take a photo of your receipt and store it for you. You can pull your receipt at any time on the app without having to store hundreds of receipts in your office. They will also be easier to find since you can search by date instead of digging through piles of receipts. 

Separate Expenses

To stay out of trouble with your taxes and the IRS, you need to separate your personal expenses from your business expenses. If you have not already, you should set up a separate bank account, savings account, and credit card for your business that is entirely separate from your personal accounts and cards. Even if you aren’t intentionally illegally mixing finances, you could find yourself in trouble if everything is under one account. It’s not worth the risk to keep everything combined. Before even starting your real estate accounting system, get everything separated immediately. 

Reconcile with Your Bank and Credit Cards

One of the biggest reasons to use a real estate accounting system is to make sure no unapproved transactions occur. By diligently updating your accounting sheet or software, you should easily know every single transaction that will appear in your bank and credit card statements. Sometimes things happen, and you could accidentally be charged for something you didn’t buy. Pay attention to every single transaction and memo and ensure that everything lines up each month. If not, give your bank or credit card company a call and get everything resolved. Sometimes you may miss something in your statements. Don’t feel bad about double-checking with these institutions; that’s what they’re there for.

Consider Outsourcing

If everything you just read looks pretty overwhelming, don’t be afraid to outsource your real estate accounting to a professional. It’s great if you don’t have to and can save some money, but you may end up making mistakes and costing yourself even more time and money if it’s overwhelming. Look into hiring an accountant or outsourcing to a CPA firm if it’s within your budget. 

Analyzing Your Data

The best part about putting all of your financial data into a real estate accounting system or software is that you have the ability to analyze it. You can pull various reports and statements to evaluate the success of your property at a glance quickly. The ease at which you can pull these reports will differ based on the software that you use. If you have opted to use Google Sheets or Excel, you’ll have to play around a bit and familiarize yourself with the reports features. If you opted to pay for real estate accounting software, you should have an easier time pulling all of this information. If you don’t have much experience creating or reading reports, there are tons of online resources to help you. To become proficient in Excel, head over to YouTube and start there. Your paid software should have a support team who can help you get what you need. 

These reports are a great asset to see how your business is performing. You can get a glimpse at individual properties or your entire portfolio. Take a look at your income and your expenses and make sure everything is looking good. For more in-depth data analysis, you can even look month to month and begin to associate successes with different business strategies and events. These reports are great if you are looking to get a loan or work with an investor. You can pull months and years of data to show them your income history and how well you’re doing. 

Understanding Basic Real Estate Accounting Terminology

Once you have determined that you are ready to get into real estate accounting, you must first thoroughly understand the terminology. Make sure you know exactly what the terms “the books” and “the supporting documents” mean before investing in real estate accounting software. 

The Books

What does it mean when someone refers to “the books” in real estate accounting? These are the paper and digital records of all the financial transactions that come through your business’s bank account. Keeping all of these financial transactions in one place helps you easily keep track of them and pull specific transactions at any given time. You can do this by entering your bank statements and receipts into a spreadsheet that you have created to help organize your finances. Your real estate accounting sheet should contain the following:

• Date of the transaction
• Check number (if applicable)
• Who the money went to
• The amount of money paid
• The account the money came from 
• A brief description explaining the transaction and what it was for
• The property associated with the transaction

Having all of this information as columns on your spreadsheet allows you to easily search for any of this information and quickly get an answer. Make sure never to skip the memo section, as it’s essential to know the purpose behind every single transaction.

The Supporting Documents

The next bit of terminology you need to learn is the phrase “supporting documents.” These supporting documents prove and support all of your financial transactions. Think of things like expenses, bank statements, tax returns, and insurance documentation. 

The Books and The Supporting Documents

How do these two things work together? When combined, your books and your supporting documents create your entire real estate accounting system. Your books are your way to track your transactions and finances and keep an eye on everything going on in your business. On the other hand, your supporting documents are proof of all of the transactions in your books. You need to keep all of these documents to prove the transaction in your books to the IRS. So why put effort into creating and organizing your books? Think of all the time it will take you to find the amount you spent on a transaction if the only place your keep it is in a folder amongst other folders in your office. Your time is valuable, and it can’t be spent digging through documents looking for one specific transaction. You need both your books and your supporting documents to be as successful as possible in your real estate career. 

Now that you understand the terminology, it’s time to get started. 

Summary

Now you know the terminology. You know who needs real estate accounting and why they need it. And you are backed with tons of tips and information to get started. Now all you need to do is decide what software you will use and commit to getting started. It may be difficult at first, but if you stick with it, you will have an organized real estate accounting system that you can rely on. Once again, if this is not something you feel comfortable undertaking, feel free to outsource to a professional. For more great tips for real estate investors, check out our articles page.