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You've just closed on a new rental property, congratulations! The entire process was arduous but you made it through to the other side even if that inspection was a bit iffy. The closing attorney hands you keys to your new place and you walk out of the closing office a new person!
But the elation is short lived because you, my friend, remember that you have tons of invoices, paper receipts, and emails to sift through to compile all of your expense data.
I've expressed my views on documentation before. In fact, the first Real Estate CPA podcast was on documentation. Want to be successful in real estate? You need to learn how to record transactions and organize them in an effective manner.
Today we’re bringing you five BIG tips for new landlords as you kick off your new bookkeeping gig.
Digitize Everything
Paper receipts are a thing of the past. The second that you pay for anything and you receive a paper receipt, you should digitize it before you stash it away never to be seen again.
What do I mean by "digitize" you ask?
I mean using a combination of smart phone applications to move paper receipts into the cloud. Some good apps are Expensify, the QBO app, or something like ReceiptBank. Regardless, pick an app that you will use consistently because you need to keep (or digitize) all receipts over $75. The only receipts that must be kept under $75 are meals/entertainment and travel.
If you can't fathom digitize receipts, you can still record the expense in your accounting software. The problem that will arise is when you are audited seven years later, you won't be able to come up with legitimate support to substantiate your expenses. Don't let that happen to you!
Use a Cloud Based Accounting Solution
Just like paper receipts, desktop based accounting solutions are archaic. Toss 'em and upgrade to a cloud based solution. We like Quick Books Online (QBO) and Xero. In my opinion, QBO offers a more powerful accounting platform for real estate investors, developers, and flippers..
A cloud based accounting solution will provide three main benefits: (1) access to real time data & reporting; (2) easy to share with team or accountant; (3) easy integration with supplemental applications.
We are tech-centric at our firm. We have so many applications that we connect to QBO to automate the accounting function that it actually makes me dizzy to think about! I've started to call it our "app sprawl" similar to urban sprawl. It's a real thing.
Desktop software is a pitiful connector to cloud based apps. I have no idea how we'd be able to function with Zapier and Bill.com.
By the way - our technology saves us an average of 1,300 hours PER MONTH. It's insane how much our firm has been able to automate. So take our advice and get a cloud based accounting solution. Worth every penny.
If you want to learn more about the benefits of QuickBooks online, take a look at this QuickBooks review we wrote on that topic.
Get a New Bank Account
Separate bank accounts are key to accounting success. Why? Because they segregate transactions automatically.
Imagine having ten properties all flowing into one bank account. You'd have to manually go into the books each month and classify the transactions per property. But if all properties have separate bank accounts, they can be auto-classified to the correct property based on the bank account booking the transaction. Pretty neat.
Obviously having a ton of bank accounts is not ideal. But you could still break it down a bit. So maybe one bank account per every two or three properties. Find a balance that works for you.
Learn About Debits and Credits
Accounting software does a great job of providing non-accountants with the ability to keep their own books. Unfortunately, bookkeeping for real estate investors is a completely different animal. You will have to learn about debits and credits. There's no other way around it. At some point, you will have to book a journal entry, most likely right when you acquire your first property.
Here's a good primer article on the topic: Debits and Credits.
Reconcile Your Books Monthly
If you follow our first three suggestions, you'll have a cloud based accounting solution with data automatically coming into it and your property will have been appropriately booked because you learned the difference between debits and credits.
The next step is to check your books on a consistent basis. Notice, I did not say regular, I said consistent basis.
When you own rental property, you likely don't have a ton of transactions occurring each month. That means you don't need to monitor the transactions on a weekly basis.
Instead, check in once per month. Schedule it on your calendar and give yourself a good 2-3 hours to review all transactions. Pull a bank statement and match the transactions that you see coming into your accounting software with the bank statement. Note that most accounting software does this automatically, but it's still good practice to double check.
Bonus Tip - Outsource Your Accounting, But Be Very Careful
At some point, your time will no longer be worth keeping your own books. You'll need to out source to another party. The question is how can you go about doing this?
There are three main options that I know of: (1) outsource to another country; (2) outsource to your property management firm; and (3) outsource to your CPA firm.
1. Outsourcing to another country. The pros are that the labor is super cheap. You can hire Philippine bookkeepers for $3/hr. And that's a good salary for those guys and gals. The cons are two fold - (1) data security may be an issue; and (2) you may not get a great work product. Again, bookkeeping for real estate investors is an entirely different beast. It's very difficult to outsource. No, I'm not saying that because I want to do your books. I'm speaking from my personal experience in doing this myself. A lot of training needs to go into getting your outside-of-the-country bookkeeping up to speed on real estate accounting.
2. Outsource to your property management firm. This is a good option for most folks. You can consolidate your services into one service provider. A one stop shop so to speak. The major problem is that most property managers couldn't keep good accounting records if their business depended on it (and it does). And who's to blame them? They are good at, wait for it, property management. Not accounting. If you go this route, you will still need to carefully review your financials each month.
3. Outsource to your CPA firm. This is the best method if your CPA firm provides accounting services. You will get clean and professional reports and month or quarter. Your CPA firm will likely work with your property management firm to clear up any issues with deposits and expenses. The major issue here is the cost. CPAs aren't cheap and they will certainly test the depth of your pockets.
Wrapping It All Up
I hope you enjoyed today’s article and learned some new landlord tips. You'll notice that I really didn't dive into how to record transactions and run journal entries. That's not what bookkeeping is about these days. It's all about getting data into the cloud and on a solution that will crunch it all for you. If you're interested in learning more about this process, or are confused about how this applies to your situation, drop me a line, I'd be happy to chat!