Mistakes happen in businesses all the time, and that includes those in the real estate industry. At P3 Accounting, we've worked with real estate professionals across the US, and we've seen firsthand how even the smallest bookkeeping errors can turn into huge complications. However, it's not as hopeless as it sounds—these common bookkeeping mistakes are definitely avoidable with the right strategies in place.
Read through some of the most common bookkeeping pitfalls in real estate, plus easy and practical ways to avoid each one of them.
1. Mixing Personal and Business Finances
The Pitfall
It's not uncommon for real estate investors to blur the lines between personal and business expenses, especially in the early stages. For example, you might have used your personal credit card to buy furniture for a rental property, or you dipped into your business account to pay personal expenses here and there. It might seem harmless at first, but this can make bookkeeping messy and complicate tax reporting.
How to Avoid It
To manage your personal and business finances properly, you should keep your business expenses and personal funds separate. You can open separate bank accounts and credit cards specifically for your real estate activities and personal finances.
Doing this makes your bookkeeping much simpler and also gives you a clearer picture of your business's financial performance. It's a small change with a big payoff, particularly when tax season rolls around.
2. Poor Record Keeping
The Pitfall
Putting receipts in a random desk drawer and forgetting to record those small transactions might seem minor, but it can quickly lead to inaccuracies in your financial statements and records. Without reliable record keeping, you might miss out on deductions or overlook unnecessary expenses.
How to Avoid It
Create a habit of recording every transaction, even if it's small. Use digital tools or apps to store receipts and track expenses. Many property management platforms can integrate directly with accounting software, making the process much easier. This way, you can maintain accurate financial records and keep an eye on your business's financial health. You can also consider bookkeeping services from firms like P3 Accounting so you've got pros handling your business expenses and financial records.
3. Forgetting to Track Mileage
The Pitfall
Driving to check on properties, meet tenants, or attend networking events is all part of the job if you're a real estate entrepreneur. But failing to track your mileage could mean missing out on tax deductions that can add up quickly.
How to Avoid It
You can use a mileage-tracking app or keep a simple log in your car. Record the date, purpose of the trip, and the miles driven. Consistent tracking makes it easier to calculate your deduction when it's time to file taxes.
4. Misclassifying Expenses
The Pitfall
Different kinds of financial transactions belong to different expense categories. Misclassifying costs like repairs versus improvements can impact how they're treated on your tax return. To be more specific, repairs are deductible immediately, while improvements typically need to be depreciated over time.
How to Avoid It
We recommend learning the difference between things like repairs and improvements. Or, you can work with an accountant who knows the rules inside and out. P3 Accounting helps clients categorize expenses correctly for smoother tax filing.
5. Ignoring Cash Flow
The Pitfall
A property can look profitable on paper, but without proper cash flow management, a lot of issues and complications can arise. That's why as business owners, it's important to prioritize cash flow and financial management. Without enough liquid or petty cash, you might end up struggling to cover unexpected expenses like emergency repairs or vacancies.
How to Avoid It
Monitor your cash flow regularly and keep a reserve fund for each property. Review your income and expenses monthly to make sure you're staying in the black. Cash flow management is one area where an experienced accountant can make a big difference, so we also recommend hiring a professional to keep things organized.
6. Missing Deadlines
The Pitfall
Real estate comes with plenty of deadlines like rent collection, mortgage payments, tax filings, and property-related bills. Missing even one can lead to penalties and late fees. Aside from the financial aspects of things, missing deadlines can also compromise relationships with vendors and tenants.
How to Avoid It
To make sure you pay your tax liability on time or don't forget about reporting sales tax, use calendars, reminders, or automated systems to track due dates. Some property management software can also send alerts for upcoming payments or deadlines.
7. Overlooking Tax Deductions
The Pitfall
There are a lot of tax deductions applicable to real estate investors, but it just so happens that things like reimbursable expenses and tax credits are overlooked because many fail to keep track of them. It's one of the most common bookkeeping mistakes we always see, which is unfortunate because missing deductions means paying more in taxes than necessary.
How to Avoid It
Keep detailed records of all eligible expenses throughout the year. Make sure you regularly review your finances with a tax professional who specializes in real estate so you're sure that you're maximizing your tax savings as much as possible.
8. Not Reconciling Accounts
The Pitfall
When you fail to reconcile your accounts (i.e. comparing your bank statements to your bookkeeping records), you'll end up with inaccurate records that can lead to discrepancies. These will be hard to untangle later on.
How to Avoid It
Schedule time each month to reconcile your accounts. Look for any transactions that don't match and resolve them right away. Doing this helps you catch errors early and keeps your financial records accurate.
9. Over-Reliance on Software
The Pitfall
Accounting software—especially the latest and most advanced ones—is a powerful tool, but relying on it without really understanding your financials can lead to a whole lot of errors. Software can only process the information and financial data you input, so mistakes in data entry can skew your results.
How to Avoid It
Remember to use accounting software as a tool and not as a substitute for understanding your finances. It still makes a big difference when you review the financial reports generated by your software. Alternatively, you can work with a professional bookkeeper or accountant to double-check your numbers for you.
10. Failing to Plan for Growth
The Pitfall
As your real estate business grows, so do your financial responsibilities. Many business owners make the mistake of failing to plan for growth, which eventually leads to a lot of missed opportunities and poor decision-making. Remember: what worked for you when you had one property may not scale well to a portfolio of ten.
How to Avoid It
Plan for growth by keeping up with financial trends, constantly improving your tax planning, and developing new (or improved) systems that can handle your company's growth. This might include upgrading your bookkeeping software, hiring additional staff, or working with a professional accounting firm like P3 Accounting to manage your expanding business.
Simplify Your Real Estate Bookkeeping With P3 Accounting
Small business owners and CEOs of larger enterprises can similarly benefit from working with a professional bookkeeper who knows all about real estate bookkeeping. Contact us today at 405-265-8383 or schedule a call on our website to learn how our personalized services can help you avoid common bookkeeping mistakes and keep your real estate business as efficient and profitable as possible!
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