Bookkeeping for Real Estate Investors

Bookkeeping for real estate investors can really be challenging.

So I created this post to help you.

We struggle with having to do it ourselves wondering what the best real estate investment accounting software is, how we should file our paperwork, etc..

I have to admit, bookkeeping is NOT my strongest attribute and I avoid it like the plague.

And by ignoring this task, it caused me to fall behind in everything – including filing taxes, reconciling bank accounts and keeping up to date with the real estate business financial strength.

When I moved into the Real Estate investment business, I knew I HAD to get control of this side of business especially working with joint venture partners, and needing to constantly borrow money from lenders.

Should I Just Hire a Real Estate Bookkeeper?

In a word, yes.

However, if you are a TRUE entrepreneur like me, you more than likely have trouble delegating because “nobody will do it like I do”.

On the other hand, if Real Estate investing is your ‘first business’ you probably have no issue with letting someone else do your books from the get go.

So which one is correct?

Both are correct.  I strongly believe you should have an understanding in all areas of your business so you may ‘supervise’ what is going on later when you are not actively doing those tasks.

It’s no different from supervising your property managers (which is why I suggest managing your first properties yourself)

Following this rule, I needed some way, or some ‘teacher’ to show me bookkeeping specific to my business in a simple and productive way so I am able to set it up and not someone else’s way of working.  Then, I could just hire someone to do it my way.

There is no doubt in my mind as you expand your business you SHOULD delegate what you do not naturally do best, but at the beginning, I see HUGE benefits to setting up your own bookkeeping.

Accountant-In-A-Box Makes Bookkeeping For Real Estate Investors a Cinch!

George Dube of Dube and Associates created a step by step easy program called “Accountant-In-A-Box”.

If you have read (and I highly recommend if you haven’t) his other books, 81 Financial and Tax Tips for the Canadian Real Estate Investor
and Legal, Tax and Accounting Strategies for the Canadian Real Estate Investor then you already realize this guy knows his stuff.

So when I started using “Accountant-In-A-Box”, I was completely hooked.

I was up and running in no time and could not believe it was that easy.

Finally, SOMEONE sat down to specifically tailor bookkeeping for Real Estate investors.

In this post, all of the methods I’m going to teach you are based on “Accountant-In-A-Box” . Because by far it is the best “teacher” I’ve found when it comes to bookkeeping for real estate investors.

And I don’t recommend ANYTHING I don’t truly believe in.

First things first…

How to Organize Your Flawless Bookkeeping System

Don’t worry, this is really easy!

The most important part to any business is the financial stability and even if you don’t want to do the bookkeeping data entry, you should still understand HOW to retrieve it once it’s filed away…both physically and electronically.

Organizing your paper files for bookkeeping entry and retrieval is super easy if you do it from the beginning.  If you don’t, it becomes overwhelming and many times ignored until it’s too late.  Many just hand this off to someone else or worse, ask their accountant to sort it all out and wonder why they have huge bills to pay after receiving their empty shoe boxes.

So why not set up an easy filing system now and save yourself time, stress and money?

To properly set up your bookkeeping system, you will need:

• A Filing cabinet (even a bankers box for now will do)
• File folders (get a variety of colors minimum 4 but try for 6) you’ll see why in later posts
• Banker’s boxes or plastic storage bins for long-term paperwork
• Receipt book for cash payments from tenants
• Stamps – received and paid (they have combo stamps or you can just write “received” and “paid” with a red pen)
• And most important;  a software program like QuickBooks Pro.

I left the software to last because sometimes it freaks people out when they have to learn a whole new program having to do with accounting but believe me, when you see how easy this actually is, you will wonder why you waited so long.

The Folder System

To keep your bookkeeping paperwork flowing properly, you will use a few folders for each property all color coded for a specific task.  AIAB suggests these:

• Temporary folder (Green)
• Tenant folder (Purple)
• Property Permanent folder (Blue)
• Property Contents folder (Orange)
• Vender/Suppliers folder (Beige)
• Corporation Long-Term folder (Red)

If you recall my post on organizing your properties, I used the ‘folder system’ as suggested by REIN and upgraded that to use binders.  It’s up to you how you want to color code your properties and files and with “Accountant-In-A-Box”, there are a few other folders associated with the property.  There is nothing wrong with switching up the colors already in your system and applying them to these categories.

The Flow System in Action

With using these file folders you will use a few to organize accounts payable transactions through your business.

1.       Collect invoice/bill/receipt

2.       Store in GREEN Temporary folder

3.       Review outstanding bills and make payments weekly

4.       Enter info from Green folder into QuickBooks Pro (weekly or monthly is best)

5.       Move paperwork to BEIGE folder after entry

6.       Supply accountant/investor with required reports for government filing (quarterly or annually)

This is just the basic flow of accounting but as you can see, it is VERY simple to understand and implement. AIAB dives into more detail on why and how to use this same system.

With the help of Accountant in a Box I have managed to set up a very easy to follow bookkeeping system that is not only within the guidelines of the Canada Revenue Agency, but also one that relieves my accountant from the evil of sorting out my paper mess (and charging me for it).

My First Bookkeeping Mistake

I think most of us stay away from bookkeeping because we are intimidated and terrified of making a mistake that costs us money.

Especially doing a journal entry to record purchase of rental property.

You are right in that your books must be kept up to date and organized, but it is not that hard once you understand the very basics “Accountant-In-A-Box” teaches you.

I was asked why QuickBooks Pro is the preferred software to use and the reason is it is much more lenient when it comes to correcting data entry.  For non-accountant types, QuickBooks Pro makes it easier for you to fix things, which brings me to my mistake – entering data the wrong way.

Before you input your data, you will want to decide how to account for the transactions.  This may be one of the reasons many stay away from this side of the business, but really there are two ways to do this in accounting; Accrual and Cash Basis.

Accrual basis: record your income and expenses when they actually occur regardless of whether you received or paid any funds.

Cash basis: record your income when the funds go into your bank account and record your expenses when they are paid out.

What’s the difference between Accrual and Cash Basis?

This very simple (albeit unrealistic) example will clarify the two methods:

• you have $50 of expenses for the year

• you have no other income

• your year-end is December 31

• On December 28 you sell an item to a customer for $75. The customer agrees to pay you in January, but she takes the item today.

Under the Cash basis of accounting, you record a loss for the year of $50 since you did not receive any cash during the year, but paid out $50.

Under the Accrual method you show a net income of $25 because you earned $75 during the year, but will be paid in January.

So which method is better?

In Canada we must report to the Canada Revenue Agency, I would lean towards the method they require you to use, which is the Accrual method even though it seems easier to use the Cash based system.  The Accrual system not only keeps you in line with the CRA, but it allows you to know what your accounts receivable is outstanding at all times.

Knowing this after reading “Accountant-In-A-Box”, and inputting my information using the cash based system, I am correcting this mistake.  Thankfully, there is not too much data to correct!   Thanks to Accountant in a Box for saving my a$$ before it was too late.

When using QuickBooks Pro for Real Estate, you will want to use the programs terms (Class, Customer, Job and Vendor) to categorize, sort and report on your data.

I was already familiar with ‘classes’ because I used Quicken for years. But now I was faced with the dilemma of using the other terms in the proper most efficient way, especially based on the accrual accounting system.  Accountant in a Box came to the rescue suggesting which QuickBooks Pro terms match the equivalent Real Estate term we all know and love.

It may sound obvious that a Vendor is a…well vendor or, supplier you have hired like a property manager but how should you set up your properties and tenants?  This is where AIAB shines.

Using QuickBooks’ Terms for Bookkeeping for Real Estate Investing

Your Real Estate business has property, tenants and vendors associated with it.  Using Accountant in a Box, you can use these terms  and set up your portfolio inside QuickBooks Pro .   Here is what Accountant in a Box suggests:

• QB/Class – For every property you rent, you need to set up a separate ‘class’.  (property A, property B…).  When you view an income statement in QuickBooks Pro, it is always associated with a class.
• QB/Customer –  Seems odd, but you will also set up a property as a Customer because accounts receivables are tracked by Customer in QuickBooks Pro.  Additionally, you may track upcoming leases for a specific property this way.
• QB/Job – Each tenant is the equivalent of a “job” and you can invoice each job (charge rent), track inactivity (late or no rent), etc.
• QB/Vendor – This is self-explanatory, it is someone you owe money to, for a good or service provided such as handymen, property management etc.

Other areas you will be shown how to set up with Accountant in a Box are:

• Investors and Shareholders
• Recording Security/Last Months Deposits
• Recording Rent Invoice
• Applying Last Month’s Rent
• Recording Rental Payments

And so much more.

Accountant in a Box is a full how-to / step-by-step manual with templates included to save you time.  I am only touching the surface win this post and I encourage you to check out the program for yourself and your business.  It will be a fantastic asset to you.