OK, I admit it, it's October and a little late in the year for making a new years resolution happen, but now then never. It's time for me to take my book keeping to the next level. When I was going through my tax preparation end of last year I realized that my shoe box bookkeeping is finally at the limit and I had to do something. Here is my story and I will keep adding as I progress (hopefully before the next tax season).
When I got started with my first rental (a duplex) I set up a very basic system. Essentially I was using a business checking account (that came with my first LLC) as my record keeping system. At the end of the year I would download all the transactions (credits and debits), copy them into a spreadsheet and ad some comments for my CPA. When you have only one mortgage, two tenants, and four water bills that works actually pretty good. What did not work so well was my CPA at the time - I could not get good answers to basic questions like depreciation of appliance etc. I went actually through a number of firms before I found the CPA I use today. It was well worth the time and like in every area you want to work with a skilled professional, who actually knows what he's doing. Cheap advise is jus that - cheap. My CPA happens to be a real estate investor as well and is naturally very familiar with the tax code related to real estate and became a great adviser for me and someone to bounce off ideas.
As my portfolio kept growing keeping track of income and expenses became more and more an issue. I started using additional bank accounts and spreadsheets to try and capture all the transactions, but at the end of the year I still needed a couple of weekends to reconcile everything with bank accounts and get it all together - as good as possible at least. Not only was it a major pain (I would make i as an accountant) I also left depreciation unclaimed and it started to realize this was costing me money. Think about that the next time you are at Home Depot and wonder if you should go with the cheaper carpet and save 30 cents.
Presenting my numbers to a banker was not easy either: it was just a pile of different documents and that made it hard for a lender to understand if I was actually making money or not. I needed a solution and started asking around: my CPA recommended Quickbooks, a software that he is using and very familiar with. There are certainly other very good programs available, but for me being on the same software platform with my CPA turned out to be actually priceless - even it took me a while to realize that.
So, I figured January 1st would be a good start date for brand new, neat and tidy books (hence the new years resolution) and went ahead to buy the software. Can't be that hard I thought: I took some accounting classes in school and there are tons of how to tutorials on the internet. So I started setting up business entities, banks, rental properties, jobs, long term liabilities, vendors and customers and populating everything with data. It was a lot of work (some late evenings after my day job) and it took me a while before I realized that I was actually generating a mess and nothing tied together properly. Mortgage payments were all over the place and not linked to properties, expenses in just one big pile and income in another one. I got increasingly frustrated, because I am used to good reports and accurate data from my corporate job. I started to see the potential that the software could have, but was not able to get any good reports from my poorly organized data. When my old laptop started blue screening and finally quit three weeks ago, I took it as a sign to start over..
This time I took a different approach and asked my CPA to help me set up. The first thing we did was to take some time to map out my business. I started to see that it is very important to draft a good structure that can not only capture your current situation, but would also allow me to cover future ventures. In my case we had to consider my rental business and also my wife's income properties. It was also necessary to capture our remodeling activities and the ability to handle lease options. I have also an account for any potential future wholesale deals. It took us a couple hours and was a great exercise. My CPA was able to show me that the way I did look at certain aspects of the business were really designed for my old shoe box bookkeeping and I needed to shift my thinking. I can already tell that this will make a huge difference going forward: actually having a plan before you start working seems obvious for almost everything, it leaves me wondering why I attempted to set up bookkeeping without one?
My plan is to get my entire business captured in the next couple weeks and I have a feeling it will be interesting. I will definitely share what I discover next and hope some of you might find some useful information in my story. Let me know what you think!
