The Top 10 Bookkeeping Mistakes Real Estate Investors Can’t Afford to Make
Want more articles like this?
Create an account today to get BiggerPocket's best blog articles delivered to your inboxSign up for free
As a real estate investor, more than likely your time is very limited therefore you have to be very wise on exactly how you spend your time.
With everything your have on your plate, bookkeeping is not a likely contender to be anywhere near the first page of your long list. This is common because bookkeeping can be tedious and mundane and take up hours of your valuable time.
The reality is though, that bookkeeping is a necessary evil that you must face head on!
As an investor it is critical to keep up to date on your financial health and the way to do this is by keeping up with your monthly bookkeeping.
Think of it this way: John spends a few hours a month doing light bookkeeping and has current financial statements. When John applies for a loan, he is able to give accurate information to the loan officer to help ensure he gets approved for the loan and that it happens rapidly.
Now, Dan is John's friend and he is a super busy guy that just doesn't feel he has enough time to dedicate to monthly bookkeeping. When he goes to apply for the loan he may end up spending twice as much time gathering his finance statements than John had to spend for the whole year!
So Dan learned a valuable lesson… it IS worth his time to prioritize light bookkeeping in his monthly responsibilities.
Now that you can see the importance of reserving just a few hours a month to light bookkeeping, let’s make sure you avoid some of the common mistakes. Accurate and consistent bookkeeping is the only way to measure your real estate’s financial success and it helps to ensure your real estate business expands.
Here are the most common mistakes investors make when it comes to bookkeeping:
1. Not Admitting Lack of Time or Experience
Most new investors can handle their own bookkeeping needs with no problem.
But what if you have a complicated situation and have many properties and not enough time?
You may need professional help and it is okay to get some. We all know that time is money and most of us value our time at a high price. So if the bookkeeping work is more like a part-time job then maybe it is to your advantage to hire someone to take care of your monthly bookkeeping.
Your bookkeeper will keep record of all your accounting changes to ensure you stay financially healthy. It will also help to free up your time so you can focus on the growth of your real estate business.
2. Bad Records
Poor record keeping is common for most investors. I myself am guilty of losing receipts or forgetting about small expenses. It is easy to do this when at the time the expense seems insignificant.
At the moment it doesn’t seem like a big deal, but when it comes to tax time it can prove to be a pain. Also, in case of an unfortunate audit by the IRS, it will serve as the necessary documentation.
Plain and simple: accurate records not only saves you time but can save you thousands of tax dollars.
3. Not Taking Time to Categorize Expenses
Whether you do the bookkeeping yourself or hire someone, make sure you or they have at least some formal training in bookkeeping practices. Making sure you accurately track the income and expenses in the correct categories ensures you have an accurate measurement of your real estate’s profitability.
Also, keeping in mind the different tax treatments of the different types of income can help ensure significant tax savings, so get your tax advisor involved when you set up your bookkeeping process.
4. No Separate Bank Accounts
If you do not have separate bank accounts for your personal and real estate activities then this can be problematic. If you are ever audited, the IRS may ask for complete records of your real estate activities and it’s not good if what you give them is co-mingled with your personal expenses.
Another tip is to make sure your bank statements are reconciled each month properly to help minimize any errors.
5. No Back-up
This day in age everything relies heavily on technology and we all know how it feels to deal with dreaded IT issues. Dealing with IT problems that suddenly spring up is now a part of life. We all have to be aware of and be prepared if something happened to our data.
It is important for every investor to have a back-up of their financials to avoid any losses.
6. Improper Classification of Employees
Investors commonly have other people that work with and for them. Some might have a combination of both employees and independent contractors.
It is vital to make sure you classify your employee vs. your independent contractor correctly so you can avoid misfiling and overpaying taxes.
7. Horrible Cash Flow Management
Investors sometimes have a small petty cash system for small expenses that you may have day in and day out. It is really important to make sure you are tracking these expenses correctly. Set up a system that lets you easily track how much money is available and what it is being used for. Make sure to keep records of these receipts.
What I do is that I take a picture of my receipts and once a month I upload them to a receipts folder.
8. Poor Communication Skills
One of the most important lines of communication is between the investor and the bookkeeper.
Your bookkeeper should always be up-to-date on the bookkeeping so that you in turn are always up-to-date with the financial health of your investments.
9. Not Tracking Reimbursable Real Estate Expenses
Its common for investors to pay for small expenses out of their personal funds. Over time, there is a big possibility that some expenses can be overlooked. Neglecting to account for these expenses can result in you losing out on the tax deductions that come with it.
If you put systems in place it will be easy for you to consistently track your reimbursable expenses.
10. Not Looking at the Results
There are countless times when I see investors who use QuickBooks enter their bank activities but fail to ever read the reports. The reports are the most important part of your bookkeeping process. It is only by reviewing your reports (Income Statement, Balance Sheet, Statement of Cash Flow) that you can determine the health of your investment and also know if your bookkeeping has been done correctly.
Now that you know the bookkeeping mistakes that you need to avoid, take a look at your bookkeeping and see if any of these apply to you.
If there is room for improvement make the changes now to avoid the headache in the future.
Upgrade your bookkeeping system and grow your real estate business.
Have you ever had a bookkeeping disaster happen due to poor management?
How did you end up fixing it?
Share in the comments below!