To run a successful real estate business, it's essential to have an organized and reliable bookkeeping system to protect your business's overall financial health. Real estate investors and agents must know the real estate bookkeeping essentials to properly manage their finances, ensure tax compliance, and maintain smooth and efficient operations.
With years of experience in providing expert financial advice and bookkeeping services to countless clients across the US, P3 Accounting has compiled the key bookkeeping practices to guide you through your journey.
An Overview of Real Estate Accounting and Bookkeeping
Real Estate Accounting
A real estate accountant is responsible for maintaining accurate records of financial transactions related to property management. A real estate accounting system includes tracking rental income property sales, and recording business expenses like property taxes, mortgage payments, property repairs, and so on.
The ultimate goal of real estate business accounting is to monitor the financial performance of real estate businesses, which can help inform their business strategy and push them to financial success. Additionally, real estate accounting goes beyond just tracking and recording the financial aspects of a business; accountants also study financial trends and help real estate professionals comply with regulations and file taxes during the tax season.
Real Estate Bookkeeping
A real estate bookkeeping system is essential to successful real estate accounting. With an organized bookkeeping system, real estate investors know exactly where their business funds are going. Bookkeeping is the process of writing down financial transactions and financial data and keeping various financial and business accounts up to date. Without proper bookkeeping, you could lose track of your finances and face legal or tax issues that could harm your real estate business.
The Importance of Bookkeeping in the Real Estate Industry
The real estate industry encompasses several aspects, including buying, selling, leasing, and managing real estate properties. The most common players in the real estate business include real estate agents, real estate investors, and property managers.
In the real estate business, proper bookkeeping is important because it keeps your finances in check. Additionally, proper bookkeeping gives you a clear picture of your business's financial health and makes tax season a breeze. Bookkeeping is basically a financial roadmap that helps you reach your financial goals and make smart financial decisions.
Bookkeeping Tips for a Successful Real Estate Business
1. Keep Track of Real Estate Transactions
Real estate agents and investors hire bookkeepers to track incoming and outgoing transactions. This means you have to track expenses like management fees, property taxes, utility costs, maintenance costs, insurance premiums, and repair costs. Meanwhile, when it comes to recording incoming transactions, you have to track rental income from tenants, income from property management fees, interest income, property sales, and commissions.
By tracking every transaction, you get to monitor your expenses and business revenue, which helps you better understand how your real estate property is performing and make business decisions based on those findings.
2. Invest in Bookkeeping and Accounting Software
Being a real estate agent or investor comes with many responsibilities that can appear daunting at first, especially if you're new to the industry. It's no secret that running a real estate venture isn't easy, which is why more and more real estate professionals operate their businesses with technology by their side, especially when it comes to financial management.
Using an accounting program in conjunction with real estate property management software can significantly make it easier for your real estate accountant to generate reports and stay organized. Additionally, this software can help streamline bookkeeping and accounting processes, leaving you with more time to focus on the more important aspects of your business.
3. Organize Financial Documents
The bookkeeping process includes keeping all your important documents in one place for easy access and tracking. These documents can include lease agreements, bank statements, financial reports, invoices, and receipts. By being organized, it will be easier for you to review transactions, prepare for an audit, and file taxes.
4. Perform Accurate Financial Reporting
Many real estate agents ensure accurate financial tracking and reporting by using an efficient real estate bookkeeping system that helps them monitor all financial transactions. Maintaining accurate financial records ensures you have a clear and updated picture of your business's overall financial status. With accurate reporting procedures, you'll have an easier time budgeting, tracking expenses, and income, and preparing for tax returns.
5. Monitor Cash Flow
Cash flow statements are financial statements detailing how money comes in (cash inflow) and leaves (outflow) a business over a specified accounting period. Real estate investors and owners should have bookkeepers keep a detailed record of money earned and spent in relation to various activities like operations, loans, and investments. It lets you know whether you've got a positive cash flow (you're earning more than you're spending) or a negative cash flow (your expenses are bigger than your income).
6. Separate Personal and Business Finances
Most real estate professionals separate their personal and business finances because accurate financial statements rely on clear and detailed records. When you keep your finances separate, you can rest assured that your income, expenses, and financial performance are correctly tracked and reported. As a result, it's easier for you to generate financial statements and manage your business's cash flow without errors and confusion.
7. Prioritize Tax Compliance
In real estate accounting and bookkeeping, accurate record-keeping and reporting help ensure that you meet the requirements of the Internal Revenue Service (IRS). When you understand and comply with tax laws, you can avoid penalties and even claim tax deductions (e.g. property management fees, repairs, and other qualified business expenses) to keep more of your income.
8. Conduct Regular Financial Checkups
Your real estate accountant should regularly conduct financial checkups. This means reviewing and checking financial records to catch any mistakes or discrepancies before they turn into bigger issues. Most real estate agents and investment trust managers conduct these checkups to make sure the financial records are in line with specific budgets and financial goals.
9. Be Familiar with Local Regulations
Similar to knowing tax laws, it's also essential to be familiar with the local regulations in your area. There will be specific rules regarding property taxes, business licenses, and rental agreements depending on where your property is located. So, to avoid fines and penalties, a real estate investor or agent should be aware of the regulations they have to follow.
10. Keep Up with Real Estate Market Trends
Real estate bookkeeping and accounting aren't just about keeping records and tracking finances; it's also about staying informed about what's happening in the real estate business. Many real estate professionals stay updated on market trends, regulation changes, and economic factors and adjust their financial strategies according to these factors. These trends help them properly plan and manage their finances and investments, giving them useful insights into the best times to sell or hold properties, and how to budget for future business expenses.
P3 Accounting: Your Reliable Partner in Real Estate Accounting and Bookkeeping
Looking for financial professionals familiar with real estate accounting processes and bookkeeping practices? P3 Accounting provides reliable and efficient bookkeeping services that can help you streamline your financial processes, giving you more time to focus on growing your business.
Call us today at 405-265-8383!
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