Especially in this sector, accounting tasks can be very tedious due to the many state regulations and a large number of transactions, because organization is one of the main keys to managing real estate accounting books. As the property manager, you should also know that there are many parts to real estate accounting.
To start, you need to have a standard process for collecting financial information. You must choose an accounting method. You should create a consistent tracking and filing system. You should know how to pay your employees and contractors.
And regularly, you need to be able to use the financial reports that you gather to assess your operations and calculate how productive your assets are. In this detailed guide to real estate accounting, we’re going to learn about what you need to know to do your job extremely well financially.
Who Uses Real Estate Accounting?
Real estate accounting is needed for property management. When you work in real estate, you handle large sums of money, and it is crucial to understand how to manage these transactions.
You are probably familiar with real estate accounting if you: operate a real estate business, administer real estate for customers, administer the housing association’s finances, operate a development firm, manage a real estate management accounting fund, and/or sell residential assets.
Knowing “real estate accounting” will help you better manage your business and understand how to manage your real estate bookkeeping will allow you to track your progress. You can see if you are making a profit and which properties are working best. It also helps you compare growth from year to year, to know how much cash you have available, prepare your tax return and pay bills on time.
Sometimes, it’s hard to set aside time to manage your real estate business accounting, but, “real estate accounting” is a vital part of property management to keep up with financial records, spot problems and see opportunities for growth.
Real estate accounting can be difficult and time-consuming. You must follow many rules required by the state to handle large transactions. By knowing how to complete some real estate accounting tasks, you can reduce the amount of time an accountant spends on your real estate bookkeeping.
10 Tips on real estate accounting
1. Discover the rules of your administrative code
First, property managers must follow the guidelines for financial management for shaping your accounting practices. Make sure your real estate books follow the rules administered by your state. You may want to ask a financial professional who specializes in real estate to help you get started.
Administrative codes can be difficult to understand, so be sure to read them carefully before doing your accounting. Also be sure to keep informed of changes in your state’s accounting codes.
2. Pick a method for accounting
You have two options to complete your books: accrual or cash. The two ways use slightly different rules for recording transactions.
Cash accounting is a simple method of tracking transactions. It makes an entry each time physical cash is changed. Record the real estate income statement when you receive it (when someone pays you a deposit) and expenses when you pay it (when you give a contractor a check for repair work). Take into account these estate accounting examples.
Accrual accounting is a little more difficult than a cash basis. It records at least two entries for each transaction. The entries are opposite but equal. It helps ensure that your books are accurate. Record revenues (f.e. when you send an invoice) and expenses (f.e. you receive an invoice) when you incur them.
There are advantages and disadvantages to accrual etc. cash accounting. Some companies must use accrual accounting. Do some research before selecting an accounting method. Then, familiarize yourself with the basic terms used and how the method works.
3. Get a system for recording entries
There are several ways to record transactions on your real estate bookkeeping. If you can afford one, you can hire a bookkeeper or an accountant who offers real estate accounting services. However, most professionals with smaller operations use real estate accounting software to make accrual accounting entries. Compared to using real estate agent expenses spreadsheets, accounting software is designed to simplify, organize and easily display all of your company’s transactions.
In addition, many accounting software programs are cloud-based. Accounting standards for real estate developers made it easy for you to update and modify any information from anywhere with an Internet connection, from any mobile or desktop device.
You can also simplify your work by investing in real estate software like Aidy, which monitors all agent activities 24/7, the most convenient matches of buyers and sellers, creates automated emails about properties, promotes your portfolios on social networks, and helps generate more revenue by increasing property sales and rentals.
Getting the help of financial software and real estate software like Aidy is a great way to manage all your marketing and lead management campaigns and get better real estate business ideas. If you are still not familiar with this software, you can read here about Real Estate CRMs.
4. Set Up Your Chart of Accounts
You need a real estate chart of accounts sample to record and organize your journal entries. A chart of accounts lists all the real estate transactions you make. You can use the accounts chart to measure performance, create reports, and locate historical transactions.
When setting up your chart of accounts, be sure to create different categories for different transactions. These can be found at charts of accounts for real estate agents, charts of accounts for real estate holding companies, or charts of accounts for real estate brokers.
Each time you make a transaction, enter it into the appropriate account. Include additional columns to provide more details about the transaction. Write a small note for each entry so you know what the transaction is for. Also be sure to include what property the entry is for.
Update the chart of commission entry in accounts frequently for accurate records. Be sure to record each transaction and calculate the correct balances for each account. The chart of accounts can be used to create financial reports and track financial health.
5. Separate your personal and business funds
Use a separate business bank account for real estate transactions. That way, all the money for your business is in one place. You can easily refer to your bank statement to find information about transactions that have been processed and those that are still pending. If you don’t have separate personal and business accounts, figuring out which transactions are personal and which are for real estate can be difficult. Confusion causes several problems, including: disorganized books, inaccurate tax returns, poorly managed cash flow, and missed growth opportunities.
By opening a separate account, you can better manage your business transactions and stay organized.
It is also worth noting that having a separate business bank account also makes you more credible and professional in the eyes of your customers. This way, customers can write their property management name on their checks instead of their personal name. This improves your image and makes your company more reputable.
6. Organize your documents
Keep the supporting documents for comparison with your accounting books. You can return to these documents to resolve discrepancies. Organizing your documents for real estate, will help you manage records easily and quickly.
Some significant documents to keep on file include receipts and invoices, credit card statements, bank statements, tax returns, insurance information, contracts, and rentals.
You can keep the documents on paper or on digital platforms. Whichever you choose, be sure to establish an organized filing system to keep track of your finances, you may need to locate them later. When storing files digitally, make sure you are using a secure platform so that your confidential information is safe.
7. Prepare and organize your invoices properly
For any growing business, one of the hardest things to control is payment collection. If not properly organized, this can be a difficult and time-consuming activity. Fortunately, there are some ways to speed up this process.
The first important step is to create effective payment conditions on your bills. The terms you give, affect how quickly and how often you are paid, and can also determine which payment platform is used. Use the following tips to improve the terms of your bill:
- Shorten your payment conditions to get paid faster.
- Include all vital parts, such as contact info, due date and amount due.
- Have a process for contacting and flagging delinquent payers.
- Be polite when talking to customers.
- Split large bills into several payments.
- Number your invoices to keep track of bills.
- Send invoices promptly to expedite collections.
As with many administrative tasks, there are technologies that can help you ensure effective payment collection. With your contact management software, designed specifically for real estate professionals, you can automate reminders of upcoming payment dates or let your client know that they are late with a payment.
8. Reconcile your books with your bank account
Keeping track of your transactions is one thing, but you must also validate that these transactions are reflected in your bank account balance. To ensure accuracy, you should reconcile your real estate monthly bookkeeping with your bank account. Through this reconciliation, you can identify any errors in your transactions and also mark any outstanding payments.
Through this reconciliation process, you should ensure that the balances are the same. Check for accounting errors, banking errors, time delays and other gaps that could be causing discrepancies. Use your backup documents to verify the correct entries.
9. Classify your workers correctly
When your business is growing, there is no doubt that you’ll need additional help to manage your properties. You can hire agents, sellers or contractors. You should properly classify your workers as employees or independent contractors. Misclassification of a worker could lead to a costly audit, back wages, penalties and interest.
So let’s be clear. When you classify someone as a contractor, you shouldn’t deduct taxes from their salary or pay employer taxes. Contractors also do not benefit from the rules on minimum wage and overtime pay. However, they do deduct taxes from wages and pay employer taxes for employees. To make sure you classify workers correctly, learn the rules specific to where you live.
In real estate, some of your employees may earn a commission, so make sure you understand how to pay them. A commission is paid in addition to regular wages. It should be included in an employee’s paycheck according to a separate monthly or bimonthly schedule. You must withhold taxes from commissions.
10. Consult a financial professional
Real estate accounting comes with many different regulations, so it is a good idea to consult an accountant regularly to help you manage your finances.
It’s always a good idea to consult a financial professional who specializes in real estate accounting. In addition to following the rules, a real estate accounting firm can help you choose a business structure, avoid unnecessary expenses, and create reports.