An accountant is known for being the backbone of any successful business, enterprise, or corporation. In commercial real estate, this statement holds true, with reports showing the success of an investor’s portfolio performance based on accounting practices’ standards.
Explore the top real estate accounting concerns, best practices, and some accounting challenges with commercial real estate transactions below.
- Top 10 Real Estate Accounting Concerns
- Commercial Real Estate Accounting Best Practices
- Accounting Challenges With Commercial Real Estate Transactions
Top 10 Real Estate Accounting Concerns
- Asset Values – Keeping on top of changes in property valuations allows investors to know what their portfolio is worth.
- Financial Performance – Awareness of an asset’s ongoing financial health and performance.
- Cash Flow Management – Knowing (or not knowing) where money is coming from or where it’s going.
- Taxes and Tax Code Changes – Paying the appropriate taxes promptly but also staying informed about evolving tax codes (like depreciation and the corporate tax rates), which impact the bottom line.
- Expenses and Receipts – Tracking spending on assets is certainly a chore, yet, it is very crucial. Bad record-keeping habits can sink an investment quickly.
- Rent Collection – Making sure everyone pays the correct rent on time and what to do if they don’t.
- Efficiency and Ease of Operations – Figuring out ways to streamline asset management.
- Complexity – Handling all the complexities of commercial real estate.
- Accounting Systems – The overall accounting’ big picture.
- Liability Issues – Ensure the financials are protected in liability or litigation.
Commercial Real Estate Accounting Best Practices
Below are some of the best practices for accounting recommended in commercial real estate. The number one thing to note is that commercial real estate investors should never spend more than they take.
Have a System
Investors should begin by having an accounting system to prevent assets from losing money. Although the specific system in use doesn’t matter, it is needed. With this system, regular asset reviews are helpful. Some investors review their assets, liabilities, expenses, and their portfolio’s overall financial performance monthly. Whatever system is chosen, an investor’s process of managing assets should be easier and not harder.
Get a Pro on Your Team
In addition to having a system, one of the best things an investor can do for their portfolio is to outsource all accounting tasks to a CPA or hire an in-house professional accountant. Once an accountant manages the portfolio finances, the complexity of transactions, expenses, taxes, and all the other finance management details are eliminated, making investments easier to handle.
Not only do investors need to know where their money goes, but they also need to know what specific things it goes towards. An accounting system makes tracking bills and receipts much more manageable. At the same time, it must still be monitored for accuracy.
Set Up an LLC
Additionally, experienced real estate investors know that setting up an LLC (or multiple LLCs) helps protect them from liability. In addition, keeping personal and business bank accounts separate is crucial for success. Furthermore, keeping separate accounts for each property is also a common practice. Investors limit risk exposure and add protection by compartmentalizing properties and their finances.
Investors or owners handling tenant rent are okay with a smaller portfolio. But as investors scale up and grow their portfolios, tracking and collecting rents becomes very complicated. Many hire a property manager to collect rent.
Accounting Challenges With Commercial Real Estate Transactions
One of the biggest accounting challenges with commercial real estate transactions is complexity. Commercial real estate transactions are complicated and cover many details.
Managing the financial aspects of owning commercial real estate can be difficult. The main challenge is handling numerous details, especially as the portfolio grows. Furthermore, real estate investors must know account balances, expenses, and the value of the assets. Tracking all of these (and other details) can be challenging.
At CXRE, we are skilled in helping our clients successfully navigate their commercial real estate portfolio. Investors can be on top of their assets and liabilities with a team of experts using the best commercial real estate practices. Contact us today to learn more.