A good bookkeeping system keeps records organized, easily searchable, and generates reports. It is essential for real estate investors as it helps them stay on top of their finances.

It’s best to separate personal and business expenses to avoid getting into trouble with the IRS. Here are five reasons why property accounting is important for real estate investors.

Taxes

Real estate accounting is an important step for commercial investors to ensure all tax rules and regulations are followed. This includes properly itemizing expenses for maximum deductions and ensuring that all documents are backed up and readily available. It also involves communicating with any invested parties – whether they’re your CPA, financial advisor, or bookkeeper – to ensure everyone is on the same page regarding documentation needs.

Document all expenses – from property repairs to insurance to taxes – so you can claim them as a business expense at tax time. Keeping on top of these expenses will help you maximize your end-of-year deductions and remain audit-proof. Also, consider depreciation – like any other asset, residential or commercial property depreciates over time due to wear and tear. This can be a major deduction for property owners. It’s worth speaking with a professional like those from Yardi about the best way to calculate depreciation for your property.

Cash Flow

Real estate investors must know their numbers like the back of their hand. This is especially true when it comes to cash flow. In a nutshell, cash flow is the difference between a property’s gross income and all expenses related to that property.

This calculation is important because it can help determine how much a property will be profitable. Many investors use rough estimates to ballpark how good a property will be, but that needs to be more accurate. Only by stripping away all the operating expenses and debt payments will you be able to see what actual cash is coming in and going out.

The best way to increase cash flow is to reduce expenses and boost income. Typically, this can be done by rising rents or reducing property maintenance costs. Another way to improve cash flow is to implement a budget, allowing property owners to track their current results against their projected goals.

Budgeting

As a real estate investor, it’s important always to have a clear picture of your financial health. This includes understanding the costs of purchasing and operating properties and planning a budget that aligns with your short and long-term goals.

Understanding your property’s finances is the first step to financial freedom and investing success. This involves generating and reviewing performance reports such as rent rolls, income statements and net cash flow reports.

When preparing these reports, it’s important to categorize each dollar coming in and out of your business as much as possible to provide accurate records for auditors or tax filers. This is easy to do with professional accounting software like QuickBooks or Xero. In addition, real estate investment accounting tools allow you to create a chart of accounts that enables you to break down expenses by property and bank ledger. This allows you to track the costs, generate owner statements and manage payroll all in one place.

Reporting

Whether it’s the income by customer report, rent roll, or expense by item reports, all the money coming in and going out must be accurately recorded. Creating a chart of accounts helps to do this by categorizing what’s coming and going so everything can be easily accounted for.

This process also makes it easier for auditors or tax filers to find what they’re looking for if there should be any questions. Separating expenses into their categories helps to provide more accurate records and may even lead to tax write-offs that would be missed if all costs were lumped together.

Another essential real estate accounting process involves bank reconciliation, which ensures that the figures reflected in the bookkeeping and bank accounts match up. This gives owners an idea of what they’re spending their money on so that they can make adjustments if necessary. The bottom line is that accurate reporting enables you to identify risks early on and manage them effectively.