How to Do Accounting for Your Real Estate Business
Professional real estate agents have a lot to manage when it comes to keeping up with clients, listings, finances, and growing personal business networks.
Success not only depends upon the ability to connect, sell, and close sales, but also on maintaining a working knowledge of administrative best practices. While it may not be the first thing many agents consider, real estate accounting principles can make or break your success.
In real estate, accounting paves a path for having accurate reports and records throughout the buying and selling processes. It also provides a way for agents to secure their own personal financial situations, and to stay organized for important activities related to tax collection and compliance.
When it comes to good, strong accounting procedures, real estate agents can’t afford to be surprised. Whether you’re a new or experienced real estate agent or property management professional, you can use the knowledge and tools in this guide to:
- Better understand the basis and need for good accounting
- Learn the differences between bookkeeping and accounting
- Adopt industry best practices for how you manage your expenses
- Simplify your processes in order to spend more time on vital business activities
- Learn the next steps for choosing a software or platform that works for you
Here’s What We’ll Cover:
Why Do Real Estate Agents Need Accounting?
Real estate agents require effective accounting procedures for a variety of reasons, some of which are based upon the type of real estate activities that a person manages.
Regardless of whether you work on smaller real estate deals or spend your time negotiating large-scale corporate contracts, having the right accounting structure is key. Real estate accounting is important for a variety of reasons, including:
- The ability to gain high-level perspective of your personal financial situation
- Insight into your business growth from year-to-year
- The opportunity to manage your cash flow and watch for potential red flags
- Having a streamlined process for generating yearly tax returns
- Looking at your outgoing expenses in order to make payments on time
The True Goal of Real Estate Accounting
When it comes to managing financial information, it’s easy to get caught up in complexities. And while it may be tempting to make excuses or avoid tedious money management tasks, real estate professionals must prioritize good accounting habits in order to maintain professionalism.
The true goal of real estate accounting is to maintain a realistic, accurate picture of how your business is doing at any given point in time, so that you are better equipped to make financially sound decisions for growth and profitability.
While this doesn’t require a complete knowledge of everything there is to know about financial management, it does require a willingness to learn, make changes, and stay on top of important accounting tasks.
Bookkeeping vs. Accounting for Real Estate
The terms “bookkeeping” and “accounting” are often used interchangeably, but when it comes to maintaining your real estate business, the two words may describe different things.
In general, bookkeeping activities include things like:
- Keeping a close eye on debit and credit card charges
- Creating a system for invoicing clients and collecting payment
- Double-checking the accuracy of bank statements and records
- Maintaining good payroll procedures (if applicable)
On the other hand, accounting is broader, and encompasses a wide range of financial tasks and responsibilities. As you consider accounting as a whole, factor in things like:
- Performing audits or financial analyses to gain insight about your financial health
- Maintaining compliance with business regulations and legal requirements
- Making important preparations for tax time
- Having an accurate understanding of profits, losses, and gains
Being able to distinguish between bookkeeping and accounting not only gives you more confidence, but it may also help you to know when to delegate tasks to other professionals who can help you manage these important areas.
Real Estate Accounting Basics—What to Track
As we’ve established so far, real estate accounting is incredibly important in several contexts.
Having a strong accounting foundation is relevant whether you sell small properties as a hobby, or whether you facilitate property management services and generate millions of dollars. Although the scale of each one is different, the underlying habits are similar.
The list below highlights some of the basic things you should track, regardless of whether your operations are just getting started or have built considerable traction.
Income From Commissions
Real estate agents generate income from property sales and from commissions associated with each closed deal. As the primary source of income, it’s vital that real estate professionals accurately track, monitor, and report all incoming sources of cash from these sources.
To keep things simple, keep track of these numbers in your accounting system of choice, rather than use separate commission trackers.
Association Fees and Expenses
Depending on employment status, real estate agents may be required to share some of their commission as a percentage with a brokerage or firm. This amount is considered an expense. Additionally, real estate professionals often pay for membership fees to associations and other nationwide organizations, which may count as deductions.
Continuing Education Costs
Maintaining a real estate license costs money in the form of renewals and continuing education classes. Consider these costs expenses, and make sure that your accountant is able to include these amounts in your costs for the year.
Although fairly basic, your job duties might require the use of standard office supplies, equipment, and other administrative tools. Larger expenses would include office rentals, event space, and recurring services such as cleaning or maintenance. As more real estate professionals operate in a mobile format, these costs may be minimal.
Marketing and advertising are the means by which you inform the community about the services you offer. These expenses can include:
- Website design and development
- Social media management
- Print and newspaper advertisements
- Online and digital advertisements
- Business cards
- Event sponsorships
Travel, Mileage, and Transportation
Going from property to property to sell, speak with clients, or monitor a network of properties requires a lot of time and travel. Don’t make the mistake of forgetting to include these numbers in your real estate accounting procedures.
Accounting Best Practices for Real Estate Agents
Now that you know the importance of strong real estate accounting and what to expect in terms of trackable financial information, it’s time to take a closer look at best practices.
Within the real estate industry, these five elements can separate fiscally responsible agents from those who rely on disorganized or outdated records in their accounts.
Conduct a Monthly Review
If you choose to use an official accounting system, much of the behind-the-scenes work will be automated. This is a huge benefit in terms of time and convenience, but you should continually monitor and perform monthly checks on your accounts.
The same is true if you work with a financial manager. Schedule a monthly meeting to review your incoming cash and outgoing expenses. If the numbers are off track, this regularity allows you to pivot and track down errors in your accounts without huge time lags.
Use Accurate Reporting Procedures
Accurate reporting relies on accurate numbers, which supports the idea of having a monthly review. Once you know that your financial data is correct, you can pull reports for your business accounts such as:
- Profit and loss (P&L) statements
- All available income streams
- Outgoing cash flow
- Tax documents
Manual accounting procedures limit you on the type of reports that you can generate with the click of a button, but automated software enables you to pull, analyze, and sort data in a short amount of time.
Separate Personal and Business Funds
Although commissions and other income sources technically belong to you as a real estate agent, lumping them into your general bank account can become an organizational hassle.
It’s wise to create a separate business account so you can keep track of every transaction. You can then connect to your personal account or transfer funds between accounts on a pre-scheduled basis.
Having separate business checking and savings accounts also makes it easier to connect them seamlessly to your accounting software or platform. Doing so can relieve an extra step or manual work for you and your accountant.
Itemize All Incoming and Outgoing Transactions
Knowing how to properly itemize your financial accounts can not only save you time and effort at tax time, but it can also alleviate stress. Once you develop patterns and a practice of good itemization, you’ll be able to complete this step with ease.
The Internal Revenue Service (IRS) uses Schedule E to define important business itemizations. Familiarize yourself with these deductions and other relevant categories on this list in order to properly manage your expenses and income streams.
Learn Local Requirements
Managing real estate is very much a local and regional game, which means that rules and requirements vary based on where you live and work. One of the best pieces of advice for better real estate accounting is to familiarize yourself with local regulations specific to your jurisdiction when you get started.
In short, managing your real estate accounting procedures is not just about personal preference. Instead, you must be in compliance with how your county, city, or state regulates real estate income.
These details could change how you choose to manage or outsource your bookkeeping needs, so it’s important to understand the expectations and policies.
Common Real Estate Accounting Mistakes
If you’re new to accounting in any industry, mistakes could be common as you get used to managing financial records and developing a bookkeeping system that works for your personal style.
Here are the most common real estate accounting mistakes and how to avoid them:
- Always back up your files, data, and other records: If you maintain information in a cloud-based system, make sure that you have an automatic backup turned on. If you’re maintaining files another way, such as on paper or via spreadsheets, develop a system for duplicating these files. There’s no greater accounting headache than having to locate critical information and not being able to.
- Don’t assume you can lump all expenses together: If you’re trying to itemize expenses for maximum tax benefits, don’t assume that each category is the same. If you’re not a tax expert, hire one to help you navigate which expenses go together, and which should be filed separately.
- Communicate with any invested party: Real estate income happens in a variety of ways, and you may rely on multiple people to close a deal or manage investments. With accounting, never assume that these individuals know what you need in terms of documentation. Verbalize what you need, and provide timely reminders about new documents, tax statements, or other proofs of purchase.
How to Simplify Your Real Estate Accounting Needs
If all of the information about real estate accounting processes has you feeling overwhelmed, don’t despair! There are always options for streamlining your real estate accounting.
Depending on how much you want to invest, most real estate agents turn to one of the following options for their accounts.
- Implementing a solid accounting platform: Intuitive and user-friendly platforms make it easy to get up to speed with your accounting procedures. There are plenty of options to suit every budget. As a bonus, many real estate accounting software options are cloud-based, which means that you can take your financial records anywhere and have 24-7 access.
- Outsourcing the work to a consultant or accountant: As you climb to new heights in your real estate business, you may find that hiring a financial manager is worth the investment. A professional can save you substantial time and effort with your accounts, while leveraging the power of accounting software and platforms that allow you to have visibility.
Streamline Your Real Estate Business Accounting
The right accounting software always takes into account everything that makes your small business unique. It’s entirely possible to find an adaptable solution that accommodates your business practices, whether that includes property management, working with tenants, or tracking commissions.
FreshBooks helps real estate agents simplify and streamline their processes for easier accounting with more clarity and insight. Intuitive features include modern invoicing, late payment reminders, interactive team collaboration, and more.
See how FreshBooks can elevate your real estate journey while helping you take your accounting skills to the next level.