{"id":152220,"date":"2023-05-12T12:01:15","date_gmt":"2023-05-12T18:01:15","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?post_type=phase-level-3&#038;p=152220"},"modified":"2023-08-07T07:38:33","modified_gmt":"2023-08-07T13:38:33","slug":"organize-real-estate-bookkeeping","status":"publish","type":"phase-level-3","link":"https:\/\/www.biggerpockets.com\/blog\/organize-real-estate-bookkeeping","title":{"rendered":"Real Estate Accounting for Newbies"},"content":{"rendered":"\n<div class=\"wp-block-cover is-light has-level3-cover-style\"><span aria-hidden=\"true\" class=\"wp-block-cover__background has-white-background-color has-background-dim-100 has-background-dim\"><\/span><div class=\"wp-block-cover__inner-container is-layout-flow wp-block-cover-is-layout-flow\">\n<figure class=\"wp-block-image size-large has-level3-rounded-figure\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"682\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2020\/07\/real-estate-accounting-1024x682.png\" alt=\"real estate accounting header image\" class=\"wp-image-135664\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2020\/07\/real-estate-accounting-1024x682.png 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2020\/07\/real-estate-accounting-300x200.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2020\/07\/real-estate-accounting.png 1360w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\">Real estate accounting<mark style=\"background-color:rgba(0, 0, 0, 0);color:#089f4b\" class=\"has-inline-color\"> made easy.<\/mark><\/h2>\n\n\n\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC8383427746\" width=\"100%\"><\/iframe>  \n\n\n\n\n<p>The goal of real estate accounting\u2014or \u201cdoing the books\u201d\u2014is an accurate record of all the money going in and out of your small business. Bookkeeping is a vital task for your real estate business, and there are several benefits to staying organized, such as freedom, legality, and profitability. When you know exactly how your business is doing at any given time, you are able to make better decisions and sleep soundly at night.<\/p>\n\n\n\n<p>You don\u2019t need to be a professional real estate accountant to keep real estate accounting records accurate. Just make sure to begin bookkeeping early, before your real estate business gets too big. Your future self will thank you.<\/p>\n\n\n\n<p><em><strong>Related: <\/strong><a href=\"https:\/\/www.biggerpockets.com\/blog\/why-you-need-real-estate-accountant\" target=\"_blank\" rel=\"noreferrer noopener\">Why You Definitely Need a Real Estate Accountant<\/a><\/em><\/p>\n<\/div><\/div>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div class=\"wp-block-cover is-light has-level3-cover-style\"><span aria-hidden=\"true\" class=\"wp-block-cover__background has-white-background-color has-background-dim-100 has-background-dim\"><\/span><div class=\"wp-block-cover__inner-container is-layout-flow wp-block-cover-is-layout-flow\">\n<h2 class=\"wp-block-heading\">Why Organized Books Are Essential<\/h2>\n\n\n\n<p>Bookkeeping is not the game of real estate itself\u2014it\u2019s the scoreboard and the game film. An organized, timely, and easy-to-use real estate accounting system serves many practical purposes. It helps you:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Track key performance measurements like cash flow, profit and loss, and net worth<\/li>\n\n\n\n<li>Compare your growth (or lack of growth) from year to year<\/li>\n\n\n\n<li>Manage your cash flow so that you don\u2019t run out<\/li>\n\n\n\n<li>Know whether novel real estate business strategies succeeded<\/li>\n\n\n\n<li>Analyze which rental properties performed best<\/li>\n\n\n\n<li>Prepare for yearly tax returns<\/li>\n\n\n\n<li>Save money on tax preparation because your CPA doesn\u2019t bill you for time spent correctly organizing your information<\/li>\n\n\n\n<li>Avoid extra time and stress digging up information for an Internal Revenue Service (IRS) audit<\/li>\n\n\n\n<li>Steer clear of IRS tax penalties or back taxes because you can\u2019t defend tax deductions you claimed<\/li>\n\n\n\n<li>Pay all your bills and financial obligations on time as agreed<\/li>\n\n\n\n<li>Raise capital with lenders and partners using real data from your past performance<\/li>\n<\/ul>\n\n\n\n<p>Good books help you meet your obligations to outside parties\u2014and make more successful real estate business decisions.<\/p>\n<\/div><\/div>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div class=\"wp-block-cover is-light has-level3-cover-style\"><span aria-hidden=\"true\" class=\"wp-block-cover__background has-white-background-color has-background-dim-100 has-background-dim\"><\/span><div class=\"wp-block-cover__inner-container is-layout-flow wp-block-cover-is-layout-flow\">\n<h2 class=\"wp-block-heading\">A Quick Breakdown<\/h2>\n\n\n\n<p>Before diving into the five steps to successful real estate accounting processes, let\u2019s cover the basic terminology. The bookkeeping system is divided into two separate buckets.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">The books<\/h3>\n\n\n\n<p>This is a paper or digital record of all financial transactions coming through your real estate business bank account(s). With everything in one place, you can easily track every transaction by entering your bank statements into the spreadsheet and organizing them.&nbsp;<\/p>\n\n\n\n<p>Your spreadsheet might look something like this:<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img loading=\"lazy\" decoding=\"async\" width=\"867\" height=\"207\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/02\/Basic-Bookkeeping-Spreadsheet-For-Real-Estate-Investors.jpg\" alt=\"Basic Bookkeeping Spreadsheet For Real Estate Investors\" class=\"wp-image-76973\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/02\/Basic-Bookkeeping-Spreadsheet-For-Real-Estate-Investors.jpg 867w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/02\/Basic-Bookkeeping-Spreadsheet-For-Real-Estate-Investors-300x72.jpg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/02\/Basic-Bookkeeping-Spreadsheet-For-Real-Estate-Investors-768x183.jpg 768w\" sizes=\"auto, (max-width: 867px) 100vw, 867px\" \/><\/figure>\n\n\n\n<p>Your Account column categorizes each transaction with simple labels. The Memo column describes in more detail what the transaction is. This is handy when you have to look back over real estate transactions months or years later. And the Property column is self-explanatory\u2014for which property did you incur the expense?<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">The supporting documents<\/h3>\n\n\n\n<p>This paperwork proves or supports all the financial transactions. It could be:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>A box of simple manila folders (or free <a href=\"https:\/\/www.google.com\/drive\/\" target=\"_blank\" rel=\"noreferrer noopener\">Google Drive account<\/a>)<\/li>\n\n\n\n<li><a href=\"http:\/\/amzn.to\/29Wpr3x\" target=\"_blank\" rel=\"noreferrer noopener\">Small, portable file boxes <\/a>or other filing cabinets (if using paper)<\/li>\n\n\n\n<li>Separate yearly folders for expenses, financial statements, tax returns, and insurance documents<br \/><\/li>\n<\/ul>\n\n\n\n<p>These two systems are two sides of the same coin, working in tandem. Books without the paperwork mean an IRS auditor may never believe your claimed expenses. But if you have paperwork and no records, you\u2019ll never have a clear, easy-to-understand summary of the financial happenings of your business.<\/p>\n<\/div><\/div>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div class=\"wp-block-cover is-light has-level3-cover-style\"><span aria-hidden=\"true\" class=\"wp-block-cover__background has-white-background-color has-background-dim-100 has-background-dim\"><\/span><div class=\"wp-block-cover__inner-container is-layout-flow wp-block-cover-is-layout-flow\">\n<h2 class=\"wp-block-heading\">Steps of Real Estate Accounting<\/h2>\n\n\n\n<p>Anyone who decides to enter the real estate industry with the goal of investing in rental properties needs to have a professional real estate accounting system. Taking the time to set up a reliable, easy-to-follow real estate accounting process can make it easier for many real estate professionals to stay on top of their business finances, which frees up brain space to focus on growing their business. Here are some steps to follow.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">1. Keep things separate<\/h3>\n\n\n\n<p>The first rule of any good real estate accounting system, this not only makes bookkeeping easier, but keeps you out of legal hot water. It\u2019s a bad idea to commingle personal and business funds\u2014especially if you are using (or plan to use) an LLC or other legal entity. The bank account, savings account, and credit cards should all be separate from personal finances.<\/p>\n\n\n\n<p><strong><em>Related: <\/em><\/strong><a href=\"https:\/\/www.biggerpockets.com\/blog\/purchasing-property-llc-why-how\" target=\"_blank\" rel=\"noreferrer noopener\"><em>Do Landlords Need an LLC for Rental Property?<\/em><\/a><\/p>\n\n\n\n<p>Also, be sure to have a primary account for travel, memberships, dues, and initial due diligence costs for investing opportunities. Tracking these expenses properly prevents the IRS from taking money it\u2019s not entitled to.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\">Tips for investors with large portfolios<\/h4>\n\n\n\n<p>As you start to invest in more properties as a real estate investor, you might ask yourself, \u201cShould I use just one bank account for all my rental properties, or one bank account per property?\u201d When creating a real estate accounting system to manage your cash flow, setting up a bank account for each rental property works wonders.<\/p>\n\n\n\n<p>But as you gain units, you will likely want to begin using one \u201cmanagement\u201d account for simplicity. After all, you don\u2019t want to have to deal with 40 checking accounts when you have 40 properties. However, the bookkeeping becomes a little more time-consuming, as you will still need to run the numbers separately for each property.<\/p>\n\n\n\n<p>Dividing up hundreds (or thousands) of transactions into separate properties takes some additional work. When you get to this point, you will likely want to use a more professional bookkeeping system like QuickBooks, or even hire a professional if you aren&#8217;t comfortable using real estate accounting software on your own.<\/p>\n\n\n\n<p>However, take note that multifamily properties are considered one property. You may have 20 units, but if that is made up of five fourplexes spread across town, you only need five accounts.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">2. Track receipts<\/h3>\n\n\n\n<p>Keep every receipt, and designate which property the receipt was for. You can even write down the property and the purpose on the receipt. This is not only helpful for deducting the right amount at tax time\u2014and proving to the IRS that you are legit\u2014but it will keep you financially organized.<\/p>\n\n\n\n<p>When you first start, the most important habit is to track and categorize everything, even if it\u2019s through a simple spreadsheet. This builds a firm foundation to expand upon when you choose to get more advanced. You can do this by hand or using Excel or Google Docs. As your business grows, you may consider real estate accounting software.<\/p>\n\n\n\n<p><strong><em>Related: <\/em><\/strong><a href=\"https:\/\/www.biggerpockets.com\/blog\/hire-the-right-cpa\" target=\"_blank\" rel=\"noreferrer noopener\"><em>The Investor\u2019s Complete Guide to Finding &amp; Hiring a Perfect CPA Match<\/em><\/a><\/p>\n\n\n\n<p>All receipts over $75 should be kept per IRS standards\u2014however, receipts do not need to be kept in a hard-copy format. Take a photo of the receipt and recycle the paper.<\/p>\n\n\n\n<p>There are two categories we always recommend keeping receipts for, even if the amount is less than $75:<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li>Meals and entertainment<\/li>\n\n\n\n<li>Travel<\/li>\n<\/ol>\n\n\n\n<p>These two categories are commonly examined during IRS reviews and audits.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">3. Itemize income and expenses<\/h3>\n\n\n\n<p>The key to mastering real estate business accounting is knowing that every dollar that flows in or out of your business must be categorized and tracked. This is when the aforementioned receipts come in handy. Keep real estate software designed to manage accounting updated as income is received or bills are paid, and make sure you\u2019re using the correct debit or credit card for each property\u2019s expenses.<\/p>\n\n\n\n<p>If you are using a spreadsheet, you may decide to wait until the end of the month to categorize each item\u2014but don\u2019t wait too long. The longer you wait to categorize the dollars going in and out of your business, the greater the chance of error. This is the benefit of itemizing your rental income and expenses on a regular basis, which is much easier to do with professional software, such as QuickBooks or Xero (more on these later). As you gain more properties, you may even consider hiring a real estate accountant.<\/p>\n\n\n\n<p>When itemizing the income and expenses, it\u2019s best to categorize them in the same categories that the IRS lists on Schedule E, the form you\u2019ll need to fill out each year at tax time. The expense categories that the IRS defines are:<br \/><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Advertising<\/li>\n\n\n\n<li>Auto and travel expenses<\/li>\n\n\n\n<li>Cleaning and maintenance<\/li>\n\n\n\n<li>Commissions<\/li>\n\n\n\n<li>Insurance<\/li>\n\n\n\n<li>Legal and other professional fees<\/li>\n\n\n\n<li>Management fees<\/li>\n\n\n\n<li>Mortgage interest paid to banks, etc.<\/li>\n\n\n\n<li>Other interest<\/li>\n\n\n\n<li>Repairs<\/li>\n\n\n\n<li>Supplies<\/li>\n\n\n\n<li>Taxes<\/li>\n\n\n\n<li>Utilities<\/li>\n\n\n\n<li>Depreciation expense or depletion (at BiggerPockets, we call this capital improvements)<\/li>\n\n\n\n<li>Other<br \/><\/li>\n<\/ul>\n\n\n\n<p>Typically, finances are tracked on a monthly basis\u2014e.g., Jan. 1 through Jan. 31, and Feb. 1 through Feb. 28. If you are using a spreadsheet, you can simply list the above categories on the left-hand side of the screen and make one column for each month.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">4. Reconcile with your bank<\/h3>\n\n\n\n<p>Compare what should be to what actually is. Again, real estate accounting aims to make the numbers line up perfectly\u2014or \u201creconcile\u201d\u2014between your bookkeeping and bank account statement.\u00a0<\/p>\n\n\n\n<p>The purpose of bank reconciliation is to double-check everything to make sure your books are accurate. Sometimes banks or businesses mess up, and you\u2019ll be charged for things you didn\u2019t buy. You could also get double-charged.<\/p>\n\n\n\n<p>When reconciling with your bank, pay attention to the starting and ending balances of your bank account, which should match your own books. If you started with $1,000 in your account and you received $800 and spent $700, you should be left with $1,100 in your account at the end of the month (because you \u201cmade\u201d an extra $100 during the month). This is an incredibly simple example, but the same concept applies no matter the size of your business operations.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">5. Create accurate reports<\/h3>\n\n\n\n<p>Lastly, after entering all this data for the property, you now will be able to generate reports on the success of your property. With professional software, this can be as simple as clicking a button. If you are doing the books by hand, though, you will be slightly limited in the kinds of reports you can generate.<\/p>\n\n\n\n<p>The most common report is a profit-loss statement, which shows all the property\u2019s income streams, expenses, and cash flow statements. If you are bookkeeping in a spreadsheet, you essentially create the profit-loss statement each month while entering the income and expenses.<\/p>\n\n\n\n<p>These statements provide an accurate snapshot of how your business is running. Want to know how much cash flow your real estate businesses generated in the past month? You can find that out easily. Perhaps you\u2019re interested in a graph of your expenses over the past three years? A report can show you that trend. Again, unless you\u2019re a pro with spreadsheets, this will be much easier to do using software.<\/p>\n\n\n\n<p>Real estate bookkeeping can seem overwhelming at first, but real estate accounting practices quickly become routine. If you don\u2019t feel comfortable doing it or don\u2019t have the time, consider hiring a bookkeeper to help you make sense of everything.<\/p>\n\n\n\n<p>You may also want to sit down with the CPA who will be doing your taxes and have them explain exactly how they want you to do the books to make their job easier. (Plus, organizing your finances however they prefer may make their services cheaper come tax time.)<\/p>\n<\/div><\/div>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div class=\"wp-block-cover is-light has-level3-cover-style\"><span aria-hidden=\"true\" class=\"wp-block-cover__background has-white-background-color has-background-dim-100 has-background-dim\"><\/span><div class=\"wp-block-cover__inner-container is-layout-flow wp-block-cover-is-layout-flow\">\n<h2 class=\"wp-block-heading\">Easily Distracted? Don\u2019t Feel Bad<\/h2>\n\n\n\n<p>Staying on top of your transactions is harder than it may seem. Real estate accounting can be hard, so don\u2019t beat yourself up. Regardless of how meticulous you are, there\u2019s no doubt that you\u2019ll miss expenses.&nbsp;<\/p>\n\n\n\n<p>Here are a few tips to help minimize the amount of missed and improperly recorded transactions:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Place some sort of indicator on your debit cards to tell you which property they belong to\u2014like writing the property address in Sharpie.<\/li>\n\n\n\n<li>Use self-checkout at the store so that you don\u2019t feel guilty for holding up the line when you check out multiple times at once. You might be buying pipes for your duplex and window sills for your multiplex. Don\u2019t get the two confused.<\/li>\n\n\n\n<li>Use a smartphone application to snap photos of receipts and upload them in real-time.<\/li>\n\n\n\n<li>If you accidentally pay for an expense out of your personal account, simply transfer business funds out of the respective rental account and into your personal account. By transferring money from your rental property\u2019s account and into your personal account, you will, in effect, see an \u201cexpense\u201d when you reconcile your bank statements at year-end. For the transfer\u2019s memo, input a brief description of what the expense was for.<\/li>\n\n\n\n<li>Remind yourself every day via a sticky note or some other indicator to track real estate accounting expenses on an ongoing basis. Your financial health will thank you.<\/li>\n<\/ul>\n<\/div><\/div>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div class=\"wp-block-cover is-light has-level3-cover-style\"><span aria-hidden=\"true\" class=\"wp-block-cover__background has-white-background-color has-background-dim-100 has-background-dim\"><\/span><div class=\"wp-block-cover__inner-container is-layout-flow wp-block-cover-is-layout-flow\">\n<h2 class=\"wp-block-heading\">Real Estate Accounting Software<\/h2>\n\n\n\n<p>No matter what type of real estate accounting system you decide to practice, you can turn to software to make the job easier. Options include:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>QuickBooks:<\/strong> This widely used software offers a range of features suitable for real estate investors. It allows you to track income and expenses, generate financial reports, manage invoices, and handle payroll.<\/li>\n\n\n\n<li><strong>Xero:<\/strong> This cloud-based software is known for its user-friendly interface and extensive functionality. It provides features like bank reconciliation, expense tracking, invoicing, financial reporting, and integration with third-party apps.<\/li>\n\n\n\n<li><strong>AppFolio: <\/strong>This comprehensive property management software includes robust real estate accounting capabilities. It allows real estate investors to automate rent collection, track expenses, generate owner statements, and handle lease management.<\/li>\n\n\n\n<li><strong>Buildium: <\/strong>This is another popular choice for real estate accounting. It enables real estate investors to track rental income, manage expenses, create financial reports, and handle lease agreements. It also offers an online portal for tenants to make payments.<\/li>\n\n\n\n<li><strong>Rentec Direct: <\/strong>This property management software offers built-in real estate accounting features. It allows real estate investors to track rental income, manage expenses, generate reports, and handle online rent payments.<\/li>\n\n\n\n<li><strong>TenantCloud: <\/strong>This cloud-based property management software includes business accounting functionality. It enables real estate investors to track rental income, manage expenses, generate financial reports, and handle lease agreements.<\/li>\n\n\n\n<li><strong>Quicken Rental Property Manager: <\/strong>This software is designed for real estate investors. It helps track rental income and expenses, create invoices, generate tax reports, and manage tenant information.<\/li>\n<\/ul>\n<\/div><\/div>\n","protected":false},"featured_media":0,"template":"","categories":[],"class_list":["post-152220","phase-level-3","type-phase-level-3","status-publish","hentry"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/phase-level-3\/152220","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/phase-level-3"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/phase-level-3"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=152220"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=152220"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}