When you are running your own real estate investing business, it's essential that you have well organized and up to date accounting books. It doesn't matter if you have 1 property or 15 properties. It doesn't matter if you have rental properties or are flipping houses or both. Each property must have a separate account.
You don't need a full time accountant but you must take the time to keep your accounts up to date. Even with 15 properties under management, you should be able to enter income and expenses and keep a profit or loss tally once a week in about one or two hours. It's a good idea to have your accounts reviewed by an accountant once a month if you have multiple properties or every couple of months if you only have one or two properties.
Each property you own should be accounted for as an asset (inventory). As an asset, it immediately has expenses for the purchase price and closing costs. These should be the first numbers recorded along with the current market value (asset value). Each week, any other expenses need to also be recorded. For a rehab, these will typically be holding costs and contractor invoices. Holding costs include insurance, utility bills, and any other costs incurred due to ownership.
Keep a paper trail. Although, you'll keep your accounting records on a computer, you need a paper trail of all invoices or bills as well as checks written. It's a bad idea doing business with cash because it's much more difficult to track. Besides, if the IRS ever audits you, you'll need to produce the invoices that you expensed on your taxes for the year.
If you are renovating a house to flip, you need to book expenses against it. Once the property sells, all rehab expenses, including purchase, closing, and administrative costs, are subtracted from the selling price and recorded on a profit and loss statement. The profit is recorded as income. The structure of a rehab property account should resemble this:
Main Street 3347 (individual file)
Maple Lane N 816 (individual file)
Country Road 1421 (individual file)
No check should be written to a contractor until he or she submits an invoice. The invoice needs to be detailed enough so that you clearly understand what you are paying for. A copy of the check should be stapled to the invoice and kept in the individual paper file for the property. This is for tax purposes as well as for you to keep track of costs for each property.
Something else you need to do for tax purposes is require each contractor to submit a signed W-9 form. The W-9 form provides you with the business name, address, and social security number or tax ID number. When preparing your yearly income tax statement, this information goes on the 1099 form that is sent to the IRS and a copy to the contractor. The 1099 is required for you to deduct expenses from the income you make on each project. It's a good idea to require contractors to submit the W-9 form before issuing a first payment because it can be difficult tracking them down at the end of the tax year. Contractors are in no hurry to fill out a W-9 because when you file a 1099, they have to report the income on their federal taxes.
It's not difficult but it is important to keep your accounting up to date at least on a weekly basis throughout the year. Otherwise, how are you going to know how much you real estate investing business profited?
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