Written by Super User
Big or small: bookkeeping is vital for financial success! While this may not be the most exciting part of being a real estate investor,
we can all agree that cash flow is most certainly the life line of any investment's success. I have worked with thousands of investors in the past decade and over-time, started to take note of some of the common mistakes that I see real estate investors make when it comes to bookkeeping. For us to ensure our investment is performing properly, we need to know the property's financial state of health. So this month, I wanted to share with you 5 of the most common mistakes that real estate investors make and how you can avoid them:
1. Improperly Categorizing Expenses: There are many types of investment related expenses. Yes you need to keep track of them to know how your investment is doing and to know how much money you have. But one of the most important reasons to make sure your expenses are categorized correctly is for tax deductions. The IRS
looks at expenses in a different way than just money going out. There are some expenses that are 100% deductible and some that are only partially deductible. It is important to categorize your expenses during your bookkeeping process to capture your expenses and to be specific with what the expenses were incurred for. With proper documentation and record keeping, these items can help you to reduce your taxable income. Therefore, it is a good idea to have someone who is an experienced bookkeeper to help you code your expenses properly to maximize your tax savings.
2. Improper or Poor Receipt Record Keeping: It is common for Real Estate Investors to keep accurate records for larger receipts, and then fail to keep records of small expenses. These small expenses add up over the year and without them, you cannot get an accurate view of how your investment is really doing. As a Real Estate Investor, you want to make sure to have a good filing system. Keep track of all the
costs involved with your investments; utilities you may pay for out of pocket, minor repairs made, and even the cost of having an extra sets of keys made. This means keeping all of your receipts from Home Depot, Lowe's, ABC Electric etc in a folder together. This will help you and your tax prepare at the end of the year. It can also provide the very much needed documentation in the event that you are audited by the IRS.
3. Not Documenting Additional Expenses: There are several expenses that Real Estate Investors incur on an ongoing basis but most do not do a very good job of documenting. Mileage is at the top of this list. Many of us drive from location to location picking up supplies, checking in on our properties, etc. but we don't keep track of how far it was from point a to point b; nor do we make a note as to what
the trip was for. The IRS has a simple policy: if it is not documented, you cannot deduct it on your tax return. Therefore, keep a mileage log. This can be done simply in your day planner or on your Blackberry. Simply enter your beginning odometer before you begin your trip and note your ending odometer when your trip is complete. Add a note as to what the trip was for and where you went. These
items can be entered into your bookkeeping on a monthly, quarterly or annual basis; and the documentation is available to support your expenses. This same opportunity is available with cell phone expenses. Other commonly overlooked expenses for real estate investors include travel, meals, and educational expenses to
name a few. The easiest and best practice is to always keep track of business activity in some type of documented form and update it for your bookkeeping on a monthly basis.
4. Neglecting to track reimbursable expenses: Unfortunately, it is common practice for Real Estate Investors to pay for expenses out of their personal funds. This often results in issues with lost or classifieds expenses and is something that can be avoided quite easily with proper documentation and organization. Rather than
dipping into personal funds throughout the month to pay for property related expenses, consider the following: Transfer a sum of money at the beginning of each month from your personal bank account to a property specific bank account. You can then pay all investment related expenses using the appropriate bank accounts thus saving you time and headache when it is time to do your bookkeeping or tax returns.
5. Cash Flow Control: For Real Estate Investors, cash flow is one of the most critical components to creating and maintaining a good return on investment. Keeping accurate books will allow you as the investor to get a grasp on the inflow and outflow of your cash. Frequent cash flow analysis can help to reveal and manage costs to make sure your money is being utilized and invested in the most efficient manner for your properties. The best way to take control of your cash flow is with consistent record keeping. Monthly bookkeeping done correctly will allow you to take reign of your cash flow and allow you to identify ways to increase it!
In conclusion, proper bookkeeping is essential for any real estate investor who wants to ensure their investment is performing at its peak. As a Real Estate Investor, having good financial records is your secret tool for success. It allows you to measure the performance of your properties and make management decisions on how to improve the property's leverage points. Further, the IRS has a simple policy: if it is not documented, you cannot deduct it on
your tax return. So please heed these simple steps to avoid common mistakes and protect your cash flow while taking your investing to the next level.