The Most Important Bookkeeping Tips For Real Estate Investors
Introduction
Being a real estate investor, you know that managing your finances can be a complex process. As an entrepreneur, you are probably juggling multiple business ventures and personal responsibilities. This means you need to find ways to make it easy on yourself when it comes to bookkeeping—especially if you're already feeling overwhelmed by the prospect of all your other responsibilities! The good news is, there are plenty of tricks for making real estate investing bookkeeping simpler than ever before. Here are five tips for mastering your accounting systems:
Keep a running total of your operating expenses.
Keeping a running total of your operating expenses is one of the most important things you can do to keep your real estate investments organized and profitable. The first step is to set up a spreadsheet or online bookkeeping software like QuickBooks where you'll be able to track everything from rent payments to utility bills, property taxes, maintenance and repairs, and capital expenses (if any).
Keep all of your records in one place—whether that's an electronic database or an old-school ledger book. Being able to quickly access this information will help you make informed decisions about whether or not it's time for another round of upgrades; if not yet, then at least when they'll be necessary next year so you don't forget!
Not only will this make it easier for investors like yourself who want their properties as attractive as possible if they choose to sell them later down the road – but also because knowing how much money can potentially come out each month helps budgeting go smoothly during high-demand seasons like wintertime when people tend to stay indoors more often than usual (which translates into higher energy bills).
Don't classify all expenses as maintenance.
Many real estate investors classify all their expenses as maintenance. This can be a costly mistake, as not all expenses are maintenance.
The definition of "maintenance" is the act or process of keeping something in good condition or repairing it when it becomes worn out or broken. For example, if you have an HVAC system in your home and its condenser coil breaks, that's considered a maintenance expense because you're keeping the HVAC system in good working order by replacing an essential component of that system.
However, if your roof needs replacing because of hail damage, this would not be considered "maintenance." It might seem like common sense to classify these types of repairs as non-maintenance but many investors make this mistake because they don't know how else to categorize them. Instead of “maintenance”, this roof replacement would most likely be a capitalized expense that would increase the basis of the property and need to be calculated into your depreciation expense.
Track all rental income cash flow.
Cash flow is the most important thing to track, and this is especially true when you’re investing in real estate. You can use a cash flow statement to find out how much money you are making and how much you are spending, which allows you to make better financial decisions, like whether or not that big investment will actually be worth it.
Use an accounting system to manage your bookkeeping.
You can choose to do your bookkeeping by hand, or use a software system. There are many good options for both. The most important thing is that you keep track of all your expenses and income, so it’s easier to manage your business costs and taxes later on.
If you use an accounting software package, make sure it’s updated regularly as new updates happen. You want to make sure that the reporting features are useful and easy-to-use too! If not, then consider switching over to another program with more features that can help your business thrive!
An online accounting service makes record keeping simple because all transactions are automatically recorded on their servers without any work required from you! It also has other advantages such as 24 hour access for reporting purposes plus user-friendly interfaces designed specifically for real estate investors like yourself who have busy schedules each day running their own businesses full time without needing much training from experts.
Of course, there's always the option of hiring someone else entirely instead: perhaps even one who specializes specifically in this kind of work - making sure everything stays organized correctly throughout every step along which way through time until finally reaching completion (or maybe even after)! Consider outsourcing your bookkeeping if you don’t have enough time to do it yourself or you don’t know how to do it properly.
Make sure you understand real estate depreciation.
Real estate depreciation is the decline in value of a piece of real estate over time due to wear and tear and the gradual passage of time. The reason why depreciation is important for real estate investors is because the IRS allows real estate investors to deduct depreciation expenses for tax purposes.
In other words, the IRS understands that real estate investors will have to spend money to keep their properties up to standards and to fight against deprecation. So, it allows them to get a tax write-off for depreciation to help them cope with these costs. And the most important benefit of depreciation is that your property will actually APPRECIATE in value, but the IRS allows you to depreciate the asset, so you get a tax break but in reality, your asset is actually worth more than when you purchased it. This might be the single greatest benefit of real estate investing.
Master these 5 practices to greatly improve your bookkeeping processes and save time and money in the long run.
Here are five ways to make sure you have the most effective bookkeeping system for your real estate business, so that you can save time and money in the long run.
Use a software system
Keep a running total of all expenses, including those related to recurring costs like insurance premiums or utilities
Keep track of all income, including deposits from tenants and interest income (even if it's just $1)
Classify expenses correctly: For instance, if you spend $200 on marketing materials and $250 on advertising, classify them as such instead of combining them into one generic "marketing" category (which makes it hard to compare numbers from month-to-month)
Make sure you understand real estate depreciation.
Conclusion
Mastering these five practices will help you streamline your bookkeeping and save time, money, and stress. Each of them is simple to implement, but their impact on your business is huge. You can spend less time in the office dealing with paperwork, and more time out building your real estate empire!
