When it comes to real estate investing, bookkeeping is a topic that people tend to avoid.
It’s more exciting to focus on buying the next rental property or flip than thinking about where the money is going for the ones already purchased.
What most people don’t realize is that accounting is the language of money, and if you know the language, you can find ways to make and keep more of it.
That doesn’t mean you need to do the bookkeeping yourself. Without the proper training and education or even enjoying working with numbers, it can very quickly lead to frustration and the books being done improperly or not at all.
Okay, so you’ve got a professional bookkeeper in place, and hired an accountant to advise you and prepare your tax returns. Now what?
How can you make bookkeeping less ‘boring’?
Years ago, I discovered I enjoyed digging through numbers in my financial reports (both personal and business). Why?
Because it’s like a treasure hunt, and the more I dug into the numbers, the more money I would find.
Wouldn’t you like digging
if you found money
every time you did?
I thought so 🙂
Remember, I’m not talking about doing the bookkeeping data entry… I’m talking about reviewing your financial reports. And there’s a BIG difference!
Bookkeeping and data entry is necessary, but it wastes your time (especially if you don’t know how to do it).
Reviewing financial statements produced by your accounting system (or provided by your bookkeeper) not only saves you money, it can also make you money by helping you make better financial and investing decisions.
Here are 8 simple ways I’ve found to not only take the ‘boring’ out of bookkeeping, but actually make it exciting (because you’ll be making or keeping more money!).
1) Find wasteful spending
This is probably one of the most important uses of financial reports. With accurate, up-to-date books, you can see each month where your money is going and come up with ways to save it.
I can’t tell you how many times I’ve dug into financial reports, only to find wasteful spending in one or more areas. That financial ‘leak’ is an easy one to fix, but without financial reports, you don’t even know it’s happening.
Remember: A dollar saved is MORE than a dollar earned… due to taxes!
2) Identify underperforming assets
You have 20 properties and yet you still don’t have enough income to cover all your expenses each month. How do you know which property is pulling you down? Detailed financial reports will tell you.
If you fix the problem property, or sell it and replace it with a better property, and your income will go up.
Alternatively, you can improve cash flow across all your property by identifying ways to boost income, and then track the improvements over time.
3) Track who owes you money
Each month your tenants pay you rent, but do you know who is behind a payment? Who still owes you money from a few months back?
Many investors don’t track this information, but if you want to maximize your income and your profits, you absolutely need to know who has paid their full rent and who has not.
Otherwise you’re leaving money on the table, and it could cost you even more money by delaying an eviction (because they haven’t paid their rent).
And if you’ve hired a property management company to manage your property for you, do NOT rely on their financial reports for this! They are not always accurate, and that financial loss is YOUR loss. Always, always have the information entered into your own accounting system so you can run your own reports.
4) Stop theft
Despite all the technological advances for paying bills, many tenants still prefer to pay with cash. This is especially true for lower income areas.
If you’re collecting all the rent in cash, no problem. But if your property manager is the one collecting the cash, it’s very easy for money to just ‘disappear’.
I’ve heard countless stories of property managers or superintendants who’ve stolen thousands of dollars from landlords… all because there was no tracking of cash transactions.
Whenever you have a property manager collecting cash rents on your behalf, always insist on them issuing receipts to the tenants and giving you a copy. And be sure to inform the tenants that they should not pay cash unless they receive a receipt from them.
Those receipts should then be entered into your accounting system, just like any other receipt or bill. That way, you not only know all cash is being deposited, you also know who still owes you money.
5) Manage Cash Flow
Do you know when your mortgages are due? Have you planned for how you will make interest payments? What about the 3 fridges and stoves you need to replace next year?
Good financial reports will help you see where potential cash flow problems can occur and allow you sufficient time to plan for and correct them.
This will not only reduce the stress of having to shuffle money around at the last minute, it can also help you avoid penalties or unnecessary interest charges on loans.
6) Determine Which Assets to Liquidate
If you’re planning to sell a few of your properties, you may need to renovate some of them. Your plan is to sell one, use the cash proceeds to renovate the others, and then sell those for higher prices. Which property should you sell first to generate the most profit?
Financial reports will help you with the answer.
Note that because of the way accounting works, the market value of the properties is not reflected in your financial reports. So you’ll need a 2nd piece of information – property valuations from a Realtor.
Combined with financial reports (to show your total outstanding debts), you can easily figure out how much equity you have in each property. The decision on which one to sell first will be easy to see.
7) Simplify Tax Time
Accountants love it when you deliver a series of financial reports to him or her in a format they understand (using a good bookkeeper will go a long way towards achieving this).
Accountants do not love it when you give them a shoebox full of receipts, and you ask them to do your tax return.
If you come prepared at tax time, you can spend relaxed time with your accountant, instead of scrambling at the last minute to prepare financial information or send them receipts.
Relaxed time is better because you’ll be discussing ways to make or save more money with your investments, tax planning for the coming year, and more.
Plus, your accounting fees will likely go down because you’re using up less of your accountant’s time.
8) Simplify reporting to Joint Venture partners (or even eliminate it!)
If you plan on using other people’s money, you will need proper financial statements to report on an ongoing basis how their investment is performing, or at a minimum, provide them for tax time. Otherwise, you’ll always be scrambling to pull the numbers together.
But the most important reason why you want good reporting is to see where it makes financial sense to not have a JV partner at all.
For example, with proper financial reports, you could see that instead of having a JV partner, it might make more sense to refinance the property with a new mortgage (or 2nd) and buy out their share. Your interest costs would be higher, but you wouldn’t be losing half the profits to your JV partner.
As you can see, good bookkeeping and financial reports are very important for real estate investors.
And once you realize the money they can help you make and keep in your pocket, not only are they are not ‘boring’, but they can even be exciting! 🙂