If you flip houses, rehab them, or purchase them for long term rentals, then you know the real estate business is full of highs and lows. The best way to be prepared for the swings is to have an accurate financial reporting system.
Not all real estate investors have a bookkeeping system that is set up for the long haul. Getting your Chart of Accounts set up in QuickBooks is the initial step to getting your system optimized working in your favor. Sometimes this initial step is ignored and the bookkeeping system unravels quickly.
Investors may focus on the purchase price and sale price of the property and ignore the small dollar amount transactions such as rehab costs, utilities, financing charges, and HUD costs.
Since your business lives and dies by the profit of each property, it would make sense to track each transaction to the penny.
Grow Your Chart Of Accounts
When setting up a new property within QuickBooks, you have 2 options; either set it up as Other Current Asset or Income/Expense item. I have found that a majority of business owners and CPAs prefer to have the properties set up as Other Current Assets.
Within each property set up 4 subaccounts; HUD, utilities, repairs, and financing. This breakdown lets you quickly reference where money is either being made or lost.
Of the many benefits, this will allow for accurate comparisons from estimates and pre-deal evaluations, time frame analysis, etc.
In addition to your traditional Chart Of Accounts your business may have set up, you will also want to set up expense accounts that will allow for tracking of 'Rehab' costs, Marketing, Research, etc. Properties may be on the radar as a potential investment, but it may not be purchased in the long run.
You will want to track these dollars to find out if you are harming your company's bottom line. Properties are often researched, evaluated, and possibly rehabbed prior to the actual purchase of it.
Handling The Bookkeeping For Your Investment
After the final HUD is recorded and all contractors/vendors have been paid, it's time to figure if you made money and if your system is working. Zero out each subcategory to the parent account.
Once that step is complete, zero out the parent account to the income account 'House Sales.'
Not all properties end up being purchased, so you will want to zero out non purchased properties to a 'Rehab' expense account. This will allow for tracking of both money spent on potential investments and ratio tracking of purchases vs. non-purchases.
This information will be important when dialing out your business model.
After your bookkeeping system is set up and the procedures are put in place and followed, you will be able to evaluate previous deals, set goals, and forecast your upcoming year or quarter. You will be able to change your mindset from a general assumption to a very specific focused goal.
Meaning, you may go from 'Let's flip houses and make money' to 'In order to be the leaders of the industry in Utah, we know we need to view 15 houses per month in order to purchase 5 that will each produce a profit of $18,000 in order to meet our yearly profit target.
We also know we really slow down for the last 3 months of the year, so we need to cram 12 months of work into 9 months or else our business will go into the red and we will have to close the doors.'
Want to get the most out of your system and grow your book of business? Feel free to contact us today to get started.