Thinking about buying your first investment property? Or, maybe you're interested in earning an income with a rental property. Either way, acclimating yourself with the world of real estate accounting and finance can come with some growing pains. From deciding on an accounting method to figuring out which metrics you need to track to determine your property's financial health, there's a lot to unpack. The good news? With a little research and preparation, you can be well on your way to success in today's lucrative real estate market.
One of the most important decisions you'll make as you get started in real estate investment is selecting an accounting method. Not only will this be critical when it comes to securing financing for your properties, but it could also impact how your overall earnings and expenses are reported.
There are two primary accounting methods used in real estate:
There's no one-size-fits-all solution for which accounting method is best. Ultimately, it will really boil down to your own preferences and the complexity of your investments. For what it's worth, many real estate investors with just one or two properties opt for the simplicity of cash accounting—but you'll need to do your research and determine which is best for your needs.
As you get into your real estate investment journey, you'll also need to understand the types of financial statements that can be useful in gauging the financial health of each property you own. Different statements can serve different purposes, so knowing when to rely on each can help inform your decision-making.
Income Statements
Income statements (or profit-and-loss statements) are an essential part of any real estate operation, as these reports detail all your profits and losses for a given time period—giving you your Net Operating Income (NOI). The higher your NOI, the easier time you may have getting approved for loans or entering into other deals.
Cash Flow Statements
Be sure to get into the habit of generating regular cash flow statements. The purpose of these is to help you (and other partners or investors) visualize where money is going day in and day out. It may include expenses like repairs and groundskeeping, as well as such profits as rent checks collected. All of this matters because it can help you get a better feel for where your money may be tied up at any given time, which may allow you to plan accordingly.
Balance Sheets
Another type of financial statement that can come in handy as a real estate investor is a balance sheet, which essentially details your assets and liabilities for a single day to help you get a better feel for your overall equity. This matters because your liquidity in a property is one of the first things lenders will look at when you need to take out additional funding for your next project.
Managing your real estate finance and accounting is something that you'll get better at as you gain more experience. As you get started, however, there are some best practices you can keep in mind to set yourself up for success.
Keep Detailed Records
First and foremost, get into the habit of keeping detailed records of everything related to your real estate investments. This includes records of all money coming in (including rent payments) as well as expenses paid out. The better your recordkeeping now, the easier time you'll have generating accurate reports down the road.
Align KPIs with Business Goals
Be sure, too, that you're tracking and focusing on the key performance indicators (KPIs) that matter most to your long-term goals and objectives. Some of the most important to keep in mind include:
Take Advantage of Automation Tools
As you'll quickly learn, handling your real estate finance and accounting can be time-consuming and tedious. However, there are all kinds of great tools on the market that can automate some of the most tedious tasks, freeing up your valuable time without sacrificing the quality of your reporting. Take time to review real estate accounting software options to find the solution that works best for your needs.
You don't need to have a degree in accounting or finance to thrive as an investor in today's real estate market. However, taking the time to understand the ins and outs of real estate finance can help you build your confidence and take proactive measures to keep your property as profitable as possible.
With these tips and best practices in mind, you can avoid common real estate investment pitfalls and set yourself up for continued success. And if you feel like you could use some additional guidance and support at any time, you could always meet with a dedicated financial advisor who specializes in real estate finance. From there, you can gain some valuable insights from an experienced professional, which could be the push you need to achieve new levels of success.
If you have any questions or would like additional information, please contact our Real Estate group.