For many investors, real estate accounting isn’t exciting. Buying, selling, and managing properties are where the fun is – but bookkeeping? Not so much. However, real estate accounting is where the investing game is won and lost. Keeping track of the money coming in, the money going out, and the data trends is the most critical part of running a successful real estate investment business.
If you’re an investor who manages your own real estate accounting, how can you be sure you’re following the best practices? What should you do to stay on top of your expenses? How can you review performance metrics to ensure your properties are profitable?
We’re breaking down five real estate accounting best practices for commercial real estate investors.
- 1. Follow State and Federal Regulations for Real Estate Accounting
- 2. Stay Organized
- 3. Separate Business and Personal Accounting
- 4. Know Your Performance Metrics and Review Regularly
- 5. Contact a Professional
- Let CXRE Help Manage Your Real Estate Accounting
1. Follow State and Federal Regulations for Real Estate Accounting
Real estate accounting can feel tedious because there are a myriad of state and local regulations that will inform how you handle your finances.
Each state’s local real estate commission and other state agencies determine real estate accounting best practices. Before you begin handling the books for your investments, you should be thoroughly familiar with these regulations to ensure compliance.
It’s a good idea to consult with real estate tax professionals or other commercial real estate professionals who can inform you about all local and state regulations. Even if you’re familiar with current tax laws for your state, be sure to keep up with any changing tax regulations. New tax laws are enacted more often than you might realize, and not adhering to these changes could be costly.
These regulations should inform your accounting strategies. These codes can often be confusing and cumbersome, so spend some time reading through them to make sure you fully understand what you should be reporting.
If you’re an investor who used a 1031 Exchange or invested in an Opportunity Zone, you could face different regulations. Consult your tax professional to learn more about your responsibilities as a commercial real estate investor.
2. Stay Organized
Real estate accounting requires meticulous organization. Not only will this help you establish performance metrics (more about that below), but it will also help you keep track of important transactions and paperwork. When it comes time to pay taxes, prepare statements for other investors, or produce documentation for an audit, your organizational skills will make these processes much more manageable.
Two Parts of Real Estate Accounting
Your bookkeeping process should actually be two parts:
- The books (your income and expense statements, and history of all transactions).
- The supporting documents (receipts, contracts, and any other documentation that supports these transactions).
Both of these parts are important to the real estate accounting process. Keeping track of both the financial transactions and maintaining documents that support those transactions will make the entire accounting process much easier.
Choose an Accounting Method
There are two methods you can use to report your income and expenditures to the IRS: Cash-basis or accrual. These systems are slightly different, and there are benefits and drawbacks to each.
Some businesses are required to use an accrual accounting system, while others are welcome to use whichever method they choose. Again, a tax or accounting specialist can help you determine which method is best for your commercial real estate business.
Should you choose to change your accounting system, you will need to notify the IRS of this change.
Have a System in Place for Managing Transactions and Supporting Documentation
Now that you’ve determined which accounting method you’ll use, the next step is to find a system that works best for your business.
However, each business must determine which program works best for their needs. Some large-scale commercial real estate operations hire an accountant or professional bookkeeper who can track expenses and income. Many smaller businesses choose accounting software instead.
Today, bookkeeping is easier than ever before. Gone are hand-written ledgers and boxes of receipts. Many reputable programs allow businesses to track expenses, create invoices, and manage receipts digitally. Additionally, many of these programs are cloud-based so that you can access the information from anywhere. Track expenses on your phone, create invoices from home, or allow members of your team to access financial statements from wherever they are.
Popular Real Estate Accounting Software
Real estate investors have several choices in accounting software. Depending on your needs, you can choose from any of the existing programs or hire a developer to create a custom accounting program for your business.
QuickBooks has a full suite of real estate accounting, expense tracking, invoicing, and other business tools for real estate investment businesses of every size.
Designed specifically for real estate investors, property managers, and other real estate professionals who want to track their finances and check performance metrics.
A great option for smaller businesses. Freshbooks has tools for invoicing, expense tracking, and even tracking time.
Based in New Zealand, Xero is cloud-based accounting software that helps investors track their expenses and income. The platform also offers a property management app as well.
While accounting software is excellent for helping investors manage their books, it’s wise to have hard copies of receipts and other supporting documentation in case you need them. Create a filing system where you can retrieve important information quickly when needed.
3. Separate Business and Personal Accounting
If you haven’t already, set up separate bank accounts for your business and personal finances. Without separate accounts, it can be difficult to distinguish which expenses are business-related and which belong to your business.
In addition, creating a separate business account can help you determine your cash position with just a glance at the account. Plus, separating your finances will make organization, tax preparation, and financial statements simpler.
Finally, setting up a separate business account gives you credibility as an investor and protects your personal finances. You can create an LLC, for instance, which will protect your personal accounts from lawsuits. While LLCs aren’t the right option for every investor, they can help streamline the accounting process and protect your personal finances.
Plus, clients will see you as a more professional investor if you have an account dedicated to your business activities.
4. Know Your Performance Metrics and Review Regularly
Don’t let your financial position be a surprise. Set up a review routine, and regularly examine your earning statement, expenses, and accounting. This way, if there is a discrepancy or an issue, you’ll catch it quickly. When you do these monthly reviews, check for any outstanding payments, bank errors, accounting errors, or other problems you need to address.
In addition to reviewing your books, it’s also important to track your earning trends and examine your business performance. Accounting software helps you track expenditures and income, but it can also generate data that will help you see the trends and performance of your investments.
Performance metrics, like vacancy rates, cash flow, gross income, and net operating expenses, can help investors determine which properties are the most profitable. These performance metrics can also show where you might cut costs, invest in improvements, or make changes to your investment strategy.
Each month, set aside time to carefully examine your financial statements and performance metrics. A few hours every few weeks can save you huge headaches down the road.
5. Contact a Professional
Let’s be honest: real estate accounting isn’t for everyone. Bookkeeping can be difficult and tedious. You’ll need to know, understand, and follow tax codes in your state. Then, there’s tracking your expenses and income and deciphering the performance metrics.
All of this in addition to the work you already do buying, selling, and managing your real estate properties.
If you’d rather hire a professional to handle your real estate accounting, you’re not alone. Many commercial real estate investors count on experienced real estate professionals to manage their bookkeeping, track the performance of their assets, and manage their commercial properties.
You might even consider hiring an accountant who checks over your books quarterly or semi-annually to save on cost. If you do choose to work with an accountant, hire someone familiar with commercial real estate investing. These accountants and tax professionals will be familiar with local tax laws and regulations and can help you navigate your bookkeeping accordingly.
Let CXRE Help Manage Your Real Estate Accounting
Here at CXRE, we can manage every part of your portfolio, from property management to real estate accounting.
We would be honored to help you maximize your commercial real estate properties. Contact us today to learn more about our services and to consult with an experienced expert.