If you are like most real estate investors, you may find joy in the "hunt", finding deals, networking, and growing your portfolio. A few handful will admit that they enjoy the administrative tasks that come with being an entrepreneur. Now that the initial tax filing deadline of 4/15 has passed, I wanted to share some best practices when it comes to bookkeeping and maintaining good records of your deals.
As much as we focus on the numbers and return on our investment. Not many talk about the money that may potentially be left on the table because of bad and/or inaccurate record keeping. Real estate investors have a distinct tax advantage when it comes to buy and hold rentals, and missing out on deductions directly correlate to a reduction on your bottom line. Below are 4 tips on bookkeeping and maintaining good records.
1. Use cloud storage to maintain your records
Nowadays, there are so many tools to help us keep accountable. Software such as Box, G-Drive, Dropbox, and others allow entrepreneurs to stay organized. Most have free basic accounts with 10-15 GB of storage that should be more than enough to store things such as receipts, purchase agreements, inspection reports, appraisal reports, warranty deeds, lease agreements, financial statements, and much more.
Good record keeping will help you defend yourself during an IRS audit, reduce CPA fees/costs, and ensure that you take all the deductions and credits you are entitled to as a real estate investor.
2. Utilize a checklist
Apps like Google Keep, Trello, and Evernote have made it really easy for investors to create systems and processes to make sure that their business runs like a well oiled machine. With 15 deals under my belt, I still do not feel like I am good enough to "wing it". As such, I use buyer scripts, and purchasing checklists when I am making offers and closing deals.
I personally found that Trello is fantastic at creating checklists and notes for me to ensure that I cover all my basis as well as stay productive by prioritizing my to-do list. Below is an example of my "Real Estate Kanban Trello Board" that I use whenever I am closing on a new rental property.
3. Prepare timely financial statements
In addition to learning about the basics of bookkeeping such as the balance sheet, profit and loss statements, and rent roll, its equally as important to make sure that these are prepared and reviewed timely. Many investors wait until the last minute before tax time, or update them every couple of months. By not staying on top of your income and expenses, you may be exposing yourself to increased losses. For example, you may have not realized that the utility bill on a vacant home has tripled in a couple months which may signal a leaky pipe not properly winterized.
Whether you are using an old fashioned excel spreadsheet, rental management software such as Quickbooks, Buildium or Stessa. As you grow your portfolio, you may want to consider outsourcing the bookkeeping function to a virtual assistant or CPA firm so that you can focus on the most important part of your business: marketing and raising capital. Regardless of which path you take, best practice is to review these transactions on a monthly basis.
4. Use a separate bank account/credit card
During my first year of real estate investing, I made the costly mistake of using my personal checking account and credit card for rental property related income and expenses. I did not have an LLC at the time, so I did not want to deal with the hassle of owning multiple cards and accounts, and also figured I would take advantage of maximizing the spend on my travel reward cards.
I quickly found this to be a time consuming mistake when combined with the fact that I did not review my statements on a monthly basis. This lead me to review over 1,000 rows of transactions online with only a couple weeks until the tax filing deadline. Even after going through the final list twice, I still couldn’t shake off the feeling that I may have missed hundreds of dollars worth of potential deductions simply because I lumped them in as a personal expense.
I have since created a separate business checking, saving, and debit/credit cards to handle all income and expenses related to my rental business. Furthermore, I created a separate Personal Capital account that aggregates these transactions on one excel form to be used during the bookkeeping process.
As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.