Whether you are new to real estate or well-versed in it, keeping your business’ books correctly is vital for tracking your investments, expenses, profits, income, etc. Avoiding common mistakes and implementing suitable solutions is crucial for the success of your investment.
Bookkeeping mistakes regularly occur in the real estate industry and cause investors substantial financial losses. Common mistakes to avoid include incorrect booking closing statements, incorrect handling of security deposits, inadequate transaction documentation, and many others.
Investing in real estate is rewarding if you consider every factor, especially those that may impact its stability and growth. In this article, we’ll discuss eight common bookkeeping mistakes in real estate investment and how to avoid them.
Mixing Personal and Business Transactions
Refrain from mixing your personal and business transactions. Separating them is extremely important, and as a real estate investor, combining them will lead to several problems.
For example, using the same account for personal and business transactions, like “traveling,” complicates the accounting process, especially with tax returns, where you may overlook tax exemptions.
How to avoid it:
Open a separate bank account designated for small personal transactions and another for the main business transactions. Keeping these accounts separate will streamline your bookkeeping process and help you track incoming and outgoing cash.
Incorrectly Booking Closing Statements
As a real estate investor, you will encounter bookkeeping closing statements that detail the financial aspects of your property sale. Incorrect closing statement entries can produce problems, including financial discrepancies, business cashflow distortions, etc., hindering your sale.
For example, a small mistake, such as spelling or using the wrong currency identifier, can delay your closing. A real estate closing statement contains all the information an investor needs before the contract is signed, and it is vital that every word be precise.
How to avoid it:
Get a thorough understanding of every closing aspect and to use a reliable bookkeeping system. Also, consider using an accounting expert to reconcile and review your closing statement regularly.
Improper Handling of Tenant Security Deposits
A common bookkeeping mistake to avoid is mishandling tenant security deposits. Security deposits are generally refundable, and using them for other purposes can lead to cash mismanagement and huge legal complications.
For example, if the books do not separate the regular income and security deposits, the business spends the deposit and loses track of its returns.
How to avoid it:
To prevent losing track of security deposits, you must place them in a separate account where you can track their returns. A separate account also provides an accurate record of the inflow and outflow of money, especially during audits.
Overlooking Property Depreciation Asset Classes
Every real estate investment is subject to property depreciation, and a common mistake is overlooking depreciation asset classes.
When applying devaluation, you must consider different classes and categories to avoid underestimating your real estate portfolio and tax benefits.
For example, if your real estate supports multiple business activities, the depreciation is based on the primary activity.
How to avoid it:
- Do a comprehensive study of property depreciation asset classes.
- Determine accurate, useful lives for fixed assets.
- Regularly update the property value portfolio.
- Use expert depreciation accounting software.
- Consult with accounting experts significantly to increase tax benefits.
Not Tracking Capital Improvements
Real estate bookkeeping covers many aspects like cash income and expenses, etc., but often neglects to track its capital improvements accurately. You must regularly track capital improvements because avoiding them can distort your investments’ actual value, and you can miss out on tax deductions.
For example, if you upgrade a building to increase your revenue, you may neglect to track the increase in the building’s value and the tax benefit from the higher value.
How to avoid it:
Implement a system to ensure that your post-improvement records are accurate and provide regular updates on all capital improvements. Most modern accounting software like QuickBooks and Sage 50cloud can track capital improvements, but a vigilant bookkeeper is still required.
Failing To Reconcile Bank Statements
You must avoid waiting too long to reconcile your bank statements. Real estate bookkeeping is an ongoing process; frequently balancing the money coming in and leaving your bank account is paramount. Failing to reconcile your bank statements regularly will lead to cash flow and other issues.
For example, you must place security deposits in a separate account to track their returns. If you do not reconcile your bank statements regularly, you may assign security deposits wrongly and use them as cash flow.
How to avoid it:
You must dedicate and set aside specific times (preferably once a month) to reconcile your bank statements. It’s a meticulous task, and you must consider using proper accounting software to lessen the workload and avoid mistakes.
Incorrectly Categorizing Business Expenses
A common bookkeeping mistake you must avoid is categorizing business expenses incorrectly. You must keep track of every financial income and expense and group it correctly.
Categorizing your business expenses makes tracking, finding, and fixing mistakes easy and prevents losses and unnecessary spending.
For example, maintenance, upgrading, and running costs often overlap, and bookkeepers incorrectly place them in the same category. Suppose you have a temporary cover over your existing roof while it is being fixed and categorizes the expense under maintenance. In that case, it is not tax-deductible, but if you categorize the temporary cover as a running cost, it is tax-deductible.
How to avoid it:
Firstly, it is vital that you familiarize yourself with the various real estate bookkeeping categories and, secondly, use good accounting software. Proper training and implementing a detailed system will reduce mistakes while ensuring you get all the benefits of tracking every category individually.
Inadequately Documenting Transactions
The backbone of bookkeeping lies in meticulously documenting everything. If you neglect to keep a document and rely on your memory, you will soon discover what a big mistake it is. Documenting every transaction is vital to avoid financial discrepancies and auditing problems.
For example, the IRS relies on documents like the running costs, upgrades and maintenance costs etc. to calculate the tax on your real estate. Without adequate proof of every transaction, you will pay more than you should or even have legal problems.
How to avoid it:
Invest in good bookkeeping software like QuickBooks Online Advanced, Microsoft Dynamics 365 and CORE Back Office. Also, you must provide training and instruction to staff on documentation protocols.
Here are a few steps to help:
- Assess your staff’s current skills
- Use an easy approach
- Incorporate coaching and feedback
- Use proper training tools and software
- Evaluate and monitor their results
Conclusion
Real estate bookkeeping mistakes happen more than you think, and they cause investors to lose money. These mistakes include incorrect booking closing statements, mishandling of security deposits, and poor transaction documentation.