A lot goes into managing investment properties, from finding those perfect tenants to finding that receipt from Home Depot. But have you found the best way to manage your finances?
If you have ever wondered: “Can I afford this?”
“How many dollars can I distribute to my partners?”
Or, “What is my lowest sales price if I want to see a return on this flip?”
Then you should be using accounting software to manage your investment in real estate.
Why Use Accounting Software?
The first time you should ask, “Can I afford this?” is before you invest in your first property. By that logic, you should be using accounting software from the beginning. In reality, few people see the benefit of or, let’s face it, the excitement in setting up their books. But by taking on the challenge early, you will save your future self thousands of dollars in bookkeeping clean-up fees and hours of headaches trying to retrace your steps.
What Accounting Software Should You Use?
If you’re just getting started in real estate investing, a simple Excel or Google Docs spreadsheet to track the transactions coming in and out of your business account will suffice. (Hint: all business transactions should be reflected in an account completely separate from your personal accounts). This is how I might set my spreadsheet up:
In the ‘Category’ column, label each transaction with what it represents, such as repairs or utilities. If you don’t know what categories to use, take a look at the IRS Schedule E categories for inspiration!
Don’t forget to include the ‘Property’ column so you can tie back all of your transactions to each property in case you do need to know just how much you’ve invested for when the right buyer comes along.
This spreadsheet is one example of how to get started using accounting software and the best thing about it is that it’s free! Right?
Well, yes and no. While you can access Google Sheets for free, and most of us have access to a paid subscription of Excel, this simplistic form of income and expense tracking is only free if each hour of your time is worth exactly $0.00.
This method is 100% manual, meaning you’ll be using your evening hours to download bank transactions into your worksheet and categorize them one at a time.
Automated Accounting Software
For the owner of one single-family property, this a spreadsheet is completely manageable. But as you start to scale your business with investors, multiple properties, and maybe even different investing strategies, you’ll need an automated accounting software (and an awesome accountant) doing the work for you. Or you can trade in those late night Netflix binges for some late night Excel excitement.
Not only will automated accounting software, like QuickBooks or Xero, save you time and money by categorizing your transactions for you (by property, no less), but it will turn that raw data into highly valuable information that you can use to attract investors or finally answer that bugging question, “Can I afford this?”
The Bottom Line
Using accounting software will help you organize your finances and help build a solid foundation for your business. And by having a solid foundation for your business, you’ll feel more confident making cash-flow decisions, seeking new investors, and planning for growth.