Investing is called the game of numbers and luck. With luck being out of one’s hand, knowing one’s numbers becomes the only possible factor that separates the good from the great.
The numbers of any business lie in its balance sheets, and no investor can be great at what they do without knowing it like the back of their hand. For the demanding business that real estate is, it can be easy for investors to forget about the numbers which come in and go out of their bank accounts while being bogged down with a difficult deal.
These problems aren’t new, and even the most successful real estate investors face them in their day to day life. There are certain principles or pieces of advice which help prioritize what you should focus on as an investor.
This article discusses a set of such principles from the field of accounting to help real estate investors keep track of their deals without losing track of their business in the process.
Even though it is seen as a must to have some form of bookkeeping and accounting in most businesses, real estate investors often overlook the importance of a properly designed accounting system.
Building a solid accounting system is the base for sound financial management. This would firstly involve you selecting either a paper/physical form of bookkeeping or selecting a software such as Yardi, Appfilio, QuickBooks, Sage and Xero or a combination of two.
Try building a system that helps you save time and money by putting the responsibility of bookkeeping in another’s hands. It is always preferred to hire a professional to do your books. It saves you money later while doing taxes and helps you invest more time into the business, which would otherwise be spent collecting receipts and making entries.
As mentioned previously, bookkeeping can be done physically or digitally. There are significant advantages to doing the accounting on a digital platform over paper-based accounting. Digital platforms/software help you save time as they are faster due to automation and machine learning features.
They also have cloud storage features; thus, on the occasion of damage to the physical records, they can be retrieved if saved digitally. You can also scan and save receipts, sale proceeds, property documents, and other important documents on this cloud.
Lastly, these programs also come with performance evaluation features that help you understand your key metrics of performance such as credit, cash flow, profit, etc. depicted in charts and graphs.
One of the first principles of accounting is to separate personal and business finances. You should always have a separate bank account for your personal expenses/incomes and that of the business.
This not only helps while keeping track of key performance areas of a business but also helps while bookkeeping and doing taxes. It is especially important to limit your liabilities in business, especially in an LLC. Opening multiple bank accounts is a method adopted by even the top real estate investors.
At the initial stages, it is advisable to open a separate bank account for each investment you make in a property. But as the number grows, it is better to concentrate them in a few bank accounts so it’s easy to keep track of your investments.
What use is investing money in accountants and software if the records are missing or haphazardly stored? That’s why it has always been emphasized in business to have a record of everything and always store receipts carefully. These are not only important as proofs of transactions in all courts of law but also are important in tax matters. Thus, it is advised that you scan all your receipts and store them digitally on a cloud so that they can be retrieved whenever required.
Accounting and compliance work for your business is not where you want to cut corners. A professional accountant does not only do your taxes at the end of the year but also helps to make sure your books are kept in accordance with the law and in compliance with rules and regulations set by the government. They also help you save money on tax payments by advising you on how to store, move, and where to invest your money.
They also help to keep you up to date about recent developments with new government regulations, which may impact your business. They also help you maintain records in a streamlined manner, which takes training and is not an easy task. This helps to save your time and attention, which can then be invested in more business-oriented tasks.
Do you wait till the end of the year to compare yearly performances as a metric of growth for your business? If so, it is time to change your approach to performance reviewing as a whole.
You should always have a monthly review of your balance sheets and income statements to know how well your investments are doing and the state of the business. They not only help in understanding what investments are paying off but also which investments to avoid. They also tell you how much credit you owe and how much cash you can spare for various business activities.
The real estate game is a very competitive and demanding business space, and the burden of accounting and doing taxes can be back-breaking work. It is always advisable to recruit as much help as you can get for your accounting.
Incorporating technology like accounting software and cloud storage can go a long way in saving time and keeping your records safe. It’s just as important to remember key accounting principles: keeping personal and business finances separate and always knowing what your key performance indicators such as cash flow, profit, credit, income, etc. are.
In the end, an investor is only as good as his portfolio, and his portfolio is only as good as his accountant, who’s maintaining it.
OHI is a fifteen-year-old real estate services company working with 50+ commercial and residential real estate developers, funds and property management companies across USA. Our deep expertise in real estate accounting, financial analysis, lease administration and asset management has helped clients cut associated costs by 40-50%. We currently provide these services to a portfolio of 50000 units across clients.
We invite you to experience finance and accounting outsourcing through us.