Real estate has always been a solid investment option, whether it be for folks looking to make some passive income as landlords, or real estate tycoons who make their living off of house flipping. While the COVID-19 pandemic definitely caused some ripples in the real estate industry, thanks to all the office spaces being vacated, the market flared right back up, stronger than ever.
In fact, if we just go by the math, real estate analytics firm CoreLogic concluded in its recent report that a whopping 26% of all real estate purchases in June 2023 were made by investors, a figure that lay below the 15 percent mark pre-pandemic.
With so many new investors on the scene, it’s no wonder that the housing market has been so tumultuous recently, with the average cost of a home almost doubling what it was in 2023 according to Zillow.
All of this is to say that, there are clearly a whole lot more new faces in the real estate landscape now. More and more people are beginning to invest in real estate as a secure asset. And with so many new players on the field, it’s only natural that not everybody would know the rules.
Luckily, this blog is precisely for those newcomers who have just tipped their toes in the business or are thinking of doing so. To be more specific, we will be covering real estate accounting, and the major dos and don’ts you need to be aware of before jumping on board.
What is Real Estate Accounting?
The name is pretty self-explanatory. Real estate accounting is accounting specifically designed for real estate businesses. Of course, the general principles of accounting are all the same. What makes real estate accounting different from a retail store’s accounting is how you leverage your financial data. There is also industry-specific jargon to learn, as well as some complex ideas such as mortgage and renting, and all the paperwork that comes with it.
Truth be told, real estate accounting is a messy business. With the sheer value of assets at play, it’s a very risky business to try and do your real estate accounting yourself. The first piece of advice any real estate aficionado will give you is to get a dedicated real estate accountant. There is a lot of legal red tape to skirt around, and one mistake in managing your taxes can put you in some serious hot water with Uncle Sam.
A sad reality, however, is that a lot of real estate investors just can’t afford to retain the services of a full-time real estate accounting professional. Thankfully, outsourced real estate accounting services in the US are gaining a lot of traction and proving to be a good alternative solution. But that’s no excuse for investors not knowing their real estate accounting. So, whether you are a hardened veteran of the real estate industry or a newcomer, we highly recommend adopting these best practices to make the most of your real estate business experience.
Top 4 Real Estate Accounting Best Practices
Keep Business and Personal Finances Separate
One of the biggest mistakes we have seen new investors make is using their personal bank accounts for their real estate investments. Things just get a whole lot easier when your financial statements aren’t filled with your regular everyday expenses alongside sizable business investments.
Tax compliance can be nightmarish with your finances all mixed up, and you’ll have a far easier time maintaining financial transparency and credibility in the industry with clean, business-only financial data. So, go and open yourself a dedicated business bank account if you haven’t already, and use that for everything real estate.
Give Accounting Software a Try
Accounting software is by far one of the most useful inventions of our time. No more needing to fill accounting books manually, or spending hours making sure you didn’t mess up inputting numbers in an Excel sheet. With the right accounting software, the accounting almost manages itself, with the software keeping track of all your data, informing you when it detects discrepancies and errors, and all in all being a solid solution for real estate accounting.
Some well-reputed names in the industry to check out are QuickBooks, Yardi, and Buildium. The first is more general, with real estate functionality, while the other two are designed specifically for real estate accounting and portfolio management. Peruse the shelves and see which of these fit you the best.
Regular Bookkeeping is Everything
You need to stay on top of your bookkeeping. No slacking when it comes to recording a recent house purchase, no dawdling after successfully flipping a property, write it all down.
It cannot be stressed enough how easily you can forget to record something. Things are always moving in our lives these days. You might say to yourself that you will record that transaction after lunch, but chances are very high that you will end up forgetting, and then when it comes time for an audit, you’re in a heap of trouble.
It sounds obvious, but there are enough horror stories out there of lax investors tanking their businesses because of poor accounting that we must emphasize the point.
Stay Informed on Local Laws and Regulations
The property and housing market is constantly in flux, with new laws and regulations passing through the local legislation regularly. Subscribe to local real estate news outlets, and keep an ear out for what’s happening. Focus on establishing good relations with fellow real estate business owners, and make a network of information for yourself. Even things like Facebook groups are a good idea. Regardless of how you do it, stay informed at all costs and protect your business from potential liability.
By adopting these real estate accounting best practices, investors can rest easy and go about their business without worry. That’s not to say that this is all there is to real estate accounting. In fact, you would need a textbook to actually cover all the facets of real estate accounting and best practices. We’ve presented four general, good habits to have as an investor, but there is always room to grow, and we encourage real estate business owners to keep researching and learning. Here is a useful guide we recommend as a nice follow-up read. As long as you keep learning and don’t get complacent, it’s all sunny skies for your business in the days to come.