Editor’s Note: This post was originally published in November 2019 and has been revamped and updated for accuracy and comprehensiveness.
As the owner of a new real estate business, you’re probably aware of the unique characteristics of your industry. You take a personal interest in the real estate market, and you are excited to do great work for your clients, whether buying or selling pieces of property.
But here’s the thing—running a real estate business is about more than making great deals. Accounting plays a major role in staying organized, managing taxes, and making smart decisions in any business.
Why accounting is important for real estate businesses
Setting up your real estate accounting system the right way will enable you to minimize the labor and stress involved in large-value transactions, extreme income fluctuations, employee pay formulas, and government regulations.
These tips are for you if your business is:
- Real estate broker or agent
- Property management
- Building construction
- Residential sales
- Real estate investment management
Another reason to keep accurate financial records is that you will probably have to show them to interested parties at some point. These entities include:
- Government bodies (e.g., the IRS)
There are many motivations to keep accurate books. And, contrary to popular belief, doing so does not have to be a major headache or hassle. With a service like Xendoo, you can outsource your bookkeeping and tax work to focus on what you do best. For more information, check out this post on how to choose the right software to simplify your real estate accounting.
Learn the Regulations
Did you know that it is not just real estate transactions that local and state commissions oversee? These bodies also oversee the financial management of a real estate business, so playing by the rules is essential. Therefore, it’s a good idea to familiarize yourself with their requirements before making any decisions about your bookkeeping system. If the language is unclear, consult a professional accountant who specializes in real estate. It’s far better to spend extra time setting up your accounting procedures properly at the start than trying to untangle a mess when you run into trouble later on.
Choose Who or What Will Do Your Real Estate Accounting
For real estate professionals, the most viable options are:
- Hire an accountant as a full-time employee
- Outsource accounting services
- Accounting software used by management or other designated employees
Hiring an accountant to work in-house is undoubtedly a powerful approach, but it will be costly and likely beyond the scope of many real estate businesses. On the other end of the spectrum, acquiring accounting software to manage the books yourself or amongst your team might be difficult if no one has proper accounting training or the time to dedicate to ensure your books are up to date. Even minor accounting mistakes can add up to bigger ones down the road.
It’s the middle ground – outsourcing accounting tasks to a third party like Xendoo – that will make the most sense for many real estate agents and brokers. This option keeps the costs down while still freeing up your time and utilizing experts to make sure the work is done properly.
Select Your Accounting Method
You have two choices: cash basis or accrual. Once you make a choice, you must stick with it, unless you submit a change request to the IRS. (Your first tax return shows the IRS which one you chose in the beginning — you don’t have to submit any forms for that.)
Cash basis accounting is often preferred by small businesses because it’s easier to maintain, and it tells you how much money you actually have in the bank on any given day. Accrual accounting is usually the choice of larger companies because it portrays a more accurate portrait of your real estate business’s financial performance. Accrual accounting also allows you to better your long-term plan, which is helpful if you are thinking about expanding your business.
Create a Chart of Accounts
This complete index of your company’s transactions is essential for knowing how you stand. It will save you many hours of work when you need to measure performance, generate a report, locate past transactions, or prepare tax returns.
The chart of accounts is organized into categories for easy sorting and retrieval. These categories can be anything you need. Under Assets, they might include Cash, Accounts Receivable, and Vehicles. Under Liabilities, you might have sub-accounts such as Accounts Payable, Loans, and Payroll.
Keep Business and Personal Transactions Separate
Don’t fall into the bad habit of pulling out your business credit card or checkbook to pay personal expenses — or vice versa. Without fail, it will cause more problems than it solves, including inaccurate books, tax mistakes, and cash flow issues.
Real estate accounting shouldn’t be complicated, and this is one of the golden rules that can keep things simple—don’t make personal purchases with business accounts. Opening a separate bank account and a credit card strictly for your business will also make you look more professional to your customers, creditors, and investors.
Fool-Proof Accounts Receivable
Collecting payments that are owed is one of the biggest headaches for small businesses. Prevent delayed and missed payments with an automated invoicing system that:
- Sends invoices promptly
- Includes all the necessary information
- Offers several convenient ways to pay
- Tracks and contacts delinquent payers
With an automated system in place, you’ll save time and avoid missing out on revenue that slipped through the cracks when you were too busy to track it down.
Reconcile Your Bank Account Every Month
Reconciling your bank account means checking that the transactions listed on the bank statement match what you have in your books. This process will identify any discrepancies so you can figure out why they happened and make a plan for avoiding those issues in the future.
Usually, it’s something simple like a financial transaction that’s recorded in your books, but the bank hasn’t processed it yet. However, it could be a more severe problem such as data entry error, misunderstandings of using the bookkeeping system, or even theft.
Figure Out Worker Pay and Taxes
Your business may pay one or more of these types of compensation:
- Salary employee
- Commission employee
- Salary plus commission employee
- Independent sub-contractor
Ideally, you’ll have payroll software that can calculate them all, as well as track them for income tax withholding. Fees to independent contractors may be handled separately by accounts payable since these workers are not, by definition, your employees.
It’s not only the fees that you have to be aware of but also the proper paperwork for each type of employee. You’ll need to learn which tax forms to collect from employees (W-2) and contractors (1099) and how to report their income to the IRS.
At Xendoo, we can also help with payroll processing as an add-on service to our real estate accounting. You won’t have to worry about issuing and filing your W-2s or1099s, which means one less thing keeping you from focusing on your business.
Make Professional Life a Little Easier
If all this seems overwhelming, consider outsourcing to financial professionals. Xendoo specializes in small business accounting. We’ll relieve you of all that work and worry with services that range from real-time bookkeeping to timely financial reports to preparing your tax return.