When it comes to real estate investing, here are several key questions you may want to ask yourself:
- Are my investments on the right track?
- Do I create enough cash flow to justify keeping the investment?
- How can I be sure that my property management company is not stealing from me?
Investors should know the answers to these questions daily. Managing your property by the numbers will help to ensure that your property is managed effectively, your returns are adequate, and your management team is a good fit for you and your property. Analyzing the numbers will help you to figure out how your property is performing, what you can do to improve your profits, and also how to distinguish what problematic areas you can provide solutions to. In order to achieve these goals, you need to have accurate numbers to work with.
Most people do not like the task of bookkeeping because it can be tedious and boring. It certainly is not the most exciting part of being an investor, but it is vital to your success since steady cash flow is the life line of your real estate business. To make sure your property is performing efficiently, you must first understand your property’s financial health. Let’s take a look at how meticulous bookkeeping can help ensure you make the right management decisions with your properties.
Real Estate Financial Health Checklist
1. Monitoring the Expenses of Your Property: To keep your property within your budget, it is important to keep detailed records of your expenses. When evaluating which repairs are reasonable enough to undertake, you must look at the numbers before committing to any huge repair or improvement projects on your investment property. While undergoing a big improvement project, you will want to make sure to keep track of your financial progress as frequently as possible. This way you can always be up-to-date on what has been spent on the project. By identifying which improvements can potentially cause you to go over budget, you can keep an eye out for any necessary adjustments that need to be made.
2. No Expense is Too Small to Count: Most real estate investors keep great records for all of their larger expenses, but few give smaller expenses the same treatment. When minor expenses are excluded, you are not able to accurately determine how your investment is performing. Smaller expenses can add up over time so you want to make sure to capture all of them. Having a good filing system in place will help you to keep track of all of the costs associated with your property improvements, utilities that you may have to pay for, any minor repairs that are paid out of pocket, and even small stuff like having an extra pair of keys made. Keep all of your receipts together from stores such as Lowe’s, Home Depot, etc. Taking these steps will help you to keep a clear picture of exactly how your property is doing. This will also help you so that you take as many deductions as possible during tax season.
3. Tax Deductions – Bigger & Better: Now that you know the importance of tracking your expenses, you might wonder what additional expenses you could be capturing for tax write-offs. There are several expenses that investors incur frequently but often miss when it comes to tax time. The first that comes to mind is mileage. Almost everyone drives to their investment properties, runs errands for the property such as getting supplies or depositing checks, etc. However, usually these mini-trips do not get tracked. To document your mileage, keep track of how far you drove as well as why you made the trip. The IRS is pretty clear on what they expect: if you do not provide documentation, you cannot deduct it. The easiest thing to do is to keep a mileage log. You can also do this for your cell phone expenses. A few other expenses real estate investors tend not to track are: travel, educational expenses and meals. This is money that may be claimed as a significant deduction so be sure to take advantage of these. You can take advantage of these opportunities simply by keeping track of these expenses with your monthly bookkeeping.
4. Don’t Forget to Reimburse Yourself: A big no-no for real estate investors is to pay for any expenses using their personal account. This is a huge mistake because it often causes confusion which results in the expense not being tracked. This can be avoided easily by accurate documentation and by staying organized. Instead of using your personal accounts to fund expenses during the month for your property, consider transferring money at the beginning of the month from your personal account to your property’s bank account. Then you can pay all of your properties’ expenses without worrying about any negative effects on your personal bookkeeping. It will also help you during tax time and protect you in case of IRS audits.
5. Take Charge of Your Cash Flow: The most crucial area for real estate investors is cash flow. Accurate bookkeeping will allow you to have more control over your finances monthly, quarterly and annually. Analyzing your cash flow on a regular basis will help you to determine if your money is being utilized in the best way possible for your property. Your new and improved bookkeeping system will let you compare how your cash flow fluctuates throughout the year. This allows you to make informed and timely decisions with respect to your investment properties.
Real Estate Success Tips
Now that you know how bookkeeping directly impacts your cash flow, it doesn’t seem as boring anymore right? We all want to manage our properties effectively while making the right decisions so be sure to have accurate financial records as part of your plan for success. These secret tools can help you leverage your property to its full potential. Remember “what gets measured gets managed”. These bookkeeping tips can help you make the right decisions to increase your cash flow.
Photo: lariqueIs Your Real Estate Financially Healthy? by Amanda Han