Essential Bookkeeping Tips for New Real Estate Investors
In recent years, there has been a lot of interest in entrepreneurial ventures and owning a business. Similarly, investing to make money and generate wealth has become another big trend. The acceleration of these developments likely came from several different sources. First, the allure of Silicon Valley startups going public and creating so many instant millionaires in a single day set off a sort of gold rush fever that swept the country. Instead of actors in Hollywood carrying a screenplay in their back pocket, we now had a new generation that was carrying a business plan.
Investing in real estate also came to the forefront, fueled by success stories, online courses and a deluge of house flipping shows on HGTV. Additionally, big events in the world also led to a lot of introspection and workers increasingly decided they wanted to be honored and treated well in life. They perceived that perhaps the only way to achieve that dream would be to go out on their own.
Investing in Rental Homes
While there are a number of ways that you can invest in real estate, you can take advantage of one of the best options available if you have a self-directed IRA. These accounts are managed by a custodian who will allow alternative investments, rather than by a bank or brokerage who would specify where you could place your money. With this type of retirement account, you are allowed to buy shares of properties. You will also be able to receive rental income and benefit from appreciation of your assets. With the right set up in place, you can maximize your deductions. You’ll then be able to leverage the tax benefits of real estate investing so that you can lower your level of taxable income and hold on to more of your profits and property appreciation.
Select the Right Accountant
When you are new to real estate, one of the first things you should do in an effort to keep tabs on your money is retain a qualified accountant who has significant expertise in financial issues, business practices and tax law as it relates to investing in rental properties. Ideally, your accountant will have a proven track record of working with other successful people over the years. Real estate is highly specialized and it’s important that you have someone looking out for your interests and making sure you follow all the tax rules. They can also advise you as to different options you might take, and how to structure your holdings so that you pay the lowest amount possible on the income and profits you generate. The right accountant will also be able to give you great business advice, which in turn should help grow your wealth.
Hire a Great Bookkeeper
In addition to having an accountant who can take care of key issues, file your returns, and watch out for tax liabilities, you’ll want to hire a great bookkeeper that can deal with the day-to-day money issues and expenses. They can set up a system that tracks all of your expenditures and potential deductions and can also perform the monthly closeout at the end of each period. They’ll categorize all of the income that comes in, the money you spend, and will produce a preliminary balance sheet and income statement at month end. They can also develop cash flow projections that give you key insights into what is coming up. All in all, they’ll provide a critical window into your financial status and will help you know exactly where you stand.
Learning the Ins and Outs of Real Estate Bookkeeping
If you are going to be putting a lot of money and effort into investing in rental homes, it’s helpful to take the time to understand the typical transaction flows associated with the business. Most investors function on a cash basis, which means that your income from rentals is realized when it is received, and expenditures are subtracted based on the day they are paid. Among other things, your bookkeeping transactions will include invoices generated for tenant billing, postings showing receipt of rent, processing of late charges, and applying the initial tenant security deposit. In addition, you’ll also have entries for purchases from vendors, payment of HOA dues and property taxes, and paying your loans or mortgages. Making the effort to do a thorough walkthrough of your rental business financial flow is highly recommended.
Select the Right Software to Track Everything
There are different systems you can use to post, track, and monitor your real estate financial transactions. It’s not unusual for a beginner to just put everything in a folder or a filing cabinet drawer. That might work for a very little while but it’s really better to get an automated system set up. You could start by simply creating a spreadsheet to track income and expenses, but this is not as reliable as using a double-entry bookkeeping system that records the debits and credits associated with a transaction. It’s also easy to make a mistake in a spreadsheet and wipe out or overlay existing data. A far better choice is to use automated accounting software that has specifically been set up for a rental home investment business. Your accountant could give you several good system options to choose from.
Learn to Maximize Income and Revenue
If you truly want to generate wealth, then you should take key steps to maximize your income and revenue. Your bookkeeper can help you set up the manual procedures or systems to support these efforts. One of the first things you can do is to keep income levels high by renewing tenant leases early in order to minimize lost income due to vacancy. It’s also helpful if you use an online rent comparison service to produce comparable so that you can make sure you are charging a fair market rent. If a unit does become vacant, leverage one of the online listing services so you can reach many prospective tenants quickly. Providing coin-operated washers and dryers on site will be important to many tenants. It’s also a good idea to provide an option to prorate the initial months’ rent, and to offer a lease termination fee that might appeal to tenants.
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