When you have real estate businesses, you don’t only manage properties, but you also need to conduct accounting. By knowing how to do it properly, you can ensure success in your business. Even if you close deals all the time, but you don’t know how accounting works in real estate, it can negatively impact your business finances. With such, keep reading to learn more about real estate accounting and how to do it the right way.
What Is Real Estate Accounting?
Real estate accounting oversees the management of financial transactions and other real estate-related tasks. The historical data captured and stored inside the system allows you to assess and predict the following information:
- Developmental and growth rate of your real estate businesses
- Valuation of business areas and possible room for improvement
- The total amount of profit in a given amount of time
- List of payables including taxes and other fees
- Comparison of payables like bills and employee salary to the total amount of revenue
What Data To Track?
The importance of real estate accounting is invaluable. The data produced and acquired from maintaining a comprehensible accounting system serves as the foundation of profitable real estate business. Regardless if you’re a real estate hobbyist or a full-time property investor, you’ll need to build the habits of managing a system that works. As such, here’s a non-exhaustive list of the data and information you need to track:
1. Commission-based Profits
Real estate agents make money through the commissions they receive by selling a property. Since this is the bread and butter of real estate businesses, it’s only fitting to precisely record and manage all the income streams that your business receives. To streamline the process, manage all of this information in a single accounting system instead of using multiple tools for each category.
2.Cost of Travel and Transportation
Real estate property owners do a lot of travelling as well, whether to visit new properties, talk to clients in person, or manage multiple properties in different locations. All these activities would eat up your time and business capital, so it’s important to log the expenses on your accounting books. This way, you can refer to such whenever you do routine audits of your business expenses.
3. Costs of Marketing
Like any other business, your real estate endeavours also need good marketing and advertising to expand their reach, but they don’t come without a cost. While some marketing efforts are free, some require some fees. Typically, marketing expenses will include the following:
- Design, development, and release of websites
- Management of content and social media marketing strategies
- Internet advertisements such as Pay-Per-Click and affiliates
- Events marketing and management
- Print advertisements
- Printed business cards
4. Back-office and Admin-Related Expense
Real estate also incurs basic administrative expenses such as using and replacing standard office supplies, computers, and other tools. It also takes up bigger expenses, including office space rents, team member’s salaries, maintenance costs, and the likes. While such payments might decrease if you move to a remote working system, you still have to pay for salaries and tools you’ll need.
6. Costs of Maintaining Licenses
The renewal of real estate licenses occurs every several years. Moreover, many agents also undertake continuing education courses. And these renewals and continuing education costs are shouldered by the organization—your business. Thus, it’s essential to include these in your accounting books to get a clearer picture of your total expenses.
Expenses from Association and Other Brokerage Fees
Real estate agents often need to remit a certain amount to brokerages as a commission, which will also be an additional cost for your business. On top of that, some professional real estate agents who are part of specific organizations also need to pay association fees, which are deducted from your business.
Real Estate Accounting Tips
As mentioned, accounting can also make or break your real estate business. If you don’t know how to do it and have many properties to manage, hiring an accountant may help. That way, you can focus on developing and improving your real estate businesses. However, you still need to learn some accounting tips, so you’ll know if your accountant is doing it right. With such, here are some real estate accounting tips you may want to consider:
1. Utilize an Accounting Management Software
Using property accounting software is helpful whether you’re starting in the real estate business or have been doing it for quite some time. In conjunction with accounting software features, modern property accounting software offers easy-to-use and navigation-friendly features. These features help you for logging closed-deals, sale information, and commission distribution. Here are the other benefits of having accounting management software:
- Centralized Management of Tools and Data: As mentioned, you can use one software to manage everything. Moreover, all users have access to these data by opening only one software. This makes other functions, such as managing invoices, easier and faster. Having a central database for invoice information also reduces the risk of errors common in manual data entry. Lastly, with all the time that has been restored by eliminating unnecessary friction, you can focus on more productive tasks.
- Access To More Comprehensive Dashboard: Most property management systems have access to customizable dashboards depending on which software you use. Having a comprehensive dashboard allows users to access specific information in just a few clicks. Different organizations need different data; thus, accessing that information makes managing multiple property information and reports more efficient.
- Accurate Analysis of Different Income and Expenses: Real estate accounting services allow quick updates for confirmed inflows and outflows of funds. This serves as evidence which will prevent potential problems in your finance department. Having a budget history also allows you to revisit your past strategies to see where things went wrong and make optimizations from there.
2. Select an Accounting Model That Suits Your Needs
Real estate business owners now have access to more streamlined accounting functions thanks to the recent advances in technologies. But before that, you must first figure out which type of accounting system best fits your needs, such as the following:
- Accrual Accounting: This type doesn’t take into account the actual transfer of money. Revenues and expenses are recorded on the accounting book despite the lack or delay of actual money exchange. Imagine you have a tenant whose rent is due but is yet to make the payment. You’ll still note the money receivable on the books despite the delayed payment.
- Cash-basis Accounting: As the name suggests, this type of system is contingent on cash movement within the business. That means you’ll only record incomes and expenses once the money has been transferred or moved.
3. Separate All Business and Personal Undertakings
It’s always a recommendation never to mix personal and business-related transactions. Business accounts must never, by any means, be used to make personal purchases. Falling into this habit only makes managing accounting and finances harder for you in the long run. It paves the way for incorrect data, cash flow errors, and faulty tax records.
Thus, you must practice the habit of using a separate account for different purchases. Not only will it make you more organized, but it’ll also make you look better in the eyes of your clients, investors, and creditors.
4. Establish Your Account Charts
To put it simply, an accounting chart is a catalogue of all the real estate related transitions you make. Having an accounting chart is vital in keeping an organized accounting journal. This catalogue will be helpful in drafting reports, comparing performance against established thresholds, and finding historical data.
Upon creation of your account charts, be sure to make several categories for different types of transactions. So, you can have a different variety for maintenance repairs and another one for insurance, admin fees, marketing, and others.
Every time a transaction or a release of money is made, don’t forget to log it into your accounts immediately. Add other supplementary details and notes about the transaction, so you know which transaction is which, and most importantly, don’t forget to include the property details.
Also, regularly update your account charts, routinely tally and conduct balance checks to ensure precise records.
5. Ensure Data Accessibility
Real estate businesses are often the prey for tax audits, which is undoubtedly a cause of stress for many business owners. Apart from that, government audits also incur a lot of expenses. During audits, the tax inspector will search every account you have to look for possible discrepancies. You can conduct government audits randomly, so you can maintain an organized data record that you can dip into in case of any issues.
In these cases, having robust property accounting software is a blessing since it keeps track of audit trails and procurement data, making inspections better.
By doing the tips above, you can improve accounting for your real estate business. You can even delegate the responsibilities to a professional accountant while also sharing the tips above. That way, real estate accounting becomes much easier and more efficient for you and your business.