Without a doubt, accounting is not a glamorous job. Accounting doesn’t have the customer-facing appeal of sales. And it doesn’t bring to mind the pizzaz that marketing does. Yet even though accountants typically may not get a lot of recognition, their job function is the backbone of any good business, enterprise, or corporation. Furthermore, your commercial real estate portfolio can’t perform as well as it could if your accounting practices aren’t up to par.
In this article, we’ll review a few real estate accounting concerns, introduce some commercial real estate accounting best practices, and cover some accounting challenges with commercial real estate transactions.
- Top 10 Real Estate Accounting Concerns
- Commercial Real Estate Accounting Best Practices
- Accounting Challenges With Commercial Real Estate Transactions
- Expand Your Commercial Real Estate Portfolio with CXRE
Top 10 Real Estate Accounting Concerns
- Asset Values – Keeping on top of changes in property valuations allows you to know what your portfolio is worth.
- Financial Performance – Being aware of your assets’ ongoing financial health and performance.
- Managing Cash Flow – Knowing (or not knowing) where the money comes from or where it goes.
- Taxes and Tax Code Changes – Promptly paying the appropriate taxes but also staying informed about evolving tax codes (like depreciation and the corporate tax rates), which impact your bottom line.
- Expenses and receipts – Tracking what you spend on your assets and when is certainly a chore. Yet it is a very beneficial chore. Otherwise, bad record-keeping habits can sink you.
- 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 – Making sure you are financially protected in case of liability or litigation
Commercial Real Estate Accounting Best Practices
To help you address the above concerns, here are some recommended commercial real estate accounting best practices. Overall, commercial real estate investors shouldn’t spend more than they take in.
Yet some investors bleed cash because they aren’t following commercial real estate accounting best practices.
Have a System
To prevent your assets from losing money, you should begin by having an accounting system. Although the specific system you use doesn’t matter, you need one. What’s more, using whatever system you have in place, regular assets reviews are helpful. To this end, some investors do monthly reviews of their assets, liabilities, expenses, and their portfolio’s overall financial performance. Overall, whatever system you choose should make managing your assets easier not harder.
Get a Pro on Your Team
In addition to having a system, one of the best things you can do for your portfolio is to outsource all accounting tasks to a CPA or professional accountant. Once you have an accountant, they can recommend and implement an accounting system. Unless you’re already an accountant, you may find yourself quickly overwhelmed by the complexity of transactions, expenses, taxes, and all the other details.
Also, if you’re a DIY type who wants to try everything themselves, that’s great. At the same time, having a professional accountant in your corner will make your life much simpler by making your investments easier to handle.
Another of our recommended commercial real estate accounting best practices is to track your expenses. Not only do you need to know where your money goes, but you also need to know what specific things it goes towards.
Thankfully, having an accounting system in place makes tracking your bills and receipts is much easier. At the same time, you still need to make sure it happens. For receipts, you can scan them electronically, use a spreadsheet, or stuff them into a folder. Regardless of how you track expenses, doing this will make your accountants’ job much easier.
Set Up an LLC
Additionally, experienced real estate investors know that setting up an LLC (or multiple LLCs) helps protect you from liability. On the heels of that, keeping your personal and business bank accounts separate is another or our commercial real estate accounting best practices. Furthermore, keeping separate accounts for each property is also a common practice. By compartmentalizing properties and their finances, you limit your exposure to risk and protect yourself.
Handling tenant rents yourself is fine when you have a smaller portfolio. But as you scale up and grow your portfolio, tracking and collecting rents becomes very complicated. At some point, you’ll want to hire a property manager to collect rents. What’s more, property managers take care of all sorts of other tasks. Once you have a property manager working for you, they will handle jobs like building operations, office leasing, tenant communications, lease administration, stakeholder reporting, and other tasks.
Accounting Challenges With Commercial Real Estate Transactions
One of the biggest accounting challenges with commercial real estate transactions is complexity. First of all, commercial real estate transactions are complicated and cover many details.
Secondly, managing the financial aspects of owning commercial real is also complicated. As a result, the main challenge is handling numerous details. Also, as your portfolio grows, the complication grows too.
Furthermore, real estate investors like you must know your account balances, your expenses, the value of your assets. Consequently, track all of these (and other details) is can be challenging. Generally speaking, a real estate investor like you should always know where your money comes from, where it goes, and your assets’ value.
Expand Your Commercial Real Estate Portfolio with CXRE
By following these and other accounting best practices for commercial real estate, investors like you can stay on top of your assets and liabilities. What’s more, but these practices are very helpful for determining asset performance when tax time rolls around.
Are you ready to expand your Houston, DFW, or San Antonio portfolio? Contact us today to learn more about Texas commercial real estate investment.