Real estate investors tend to be extremely independent. That independence is one of the best things about these entrepreneurs, but that “go-it-alone” streak can lead to serious bookkeeping oversights that will create big problems in your real estate business. While most investors acknowledge they have neither the time nor the training to handle their own bookkeeping, probably four in five will attempt to do so anyway. As a professional bookkeeper, I often find myself encountering and attempting to resolve the fallout of this ambitious and well-intentioned decision when the investor finds that there are simply not enough hours in the day to get it all done.
If you do decide to keep your own books, be aware of these five common bookkeeping mistakes. Avoiding these small errors will save you big bucks in the long run.
Mistake 1 | Blending Business and Life
When you are first starting out in real estate, it may be tempting to try to “keep things simple” and use your personal bank accounts for your business expenses. This will not keep things simple! It just creates unnecessary confusion and, more importantly, makes it very, very difficult to access the tax deductions you deserve.
Set up separate accounts for your business and personal life and then adhere to the separation rigorously. Do not “fudge” these expenses. If a purchase is a true business expense, run it through the business account and then keep clear, accurate records of what you bought and how you used it. If you do have to make a business purchase with your personal account, reimburse yourself and create a clear paper trail for that reimbursement. Avoid doing the opposite, since it can only lead to trouble.
Mistake 2 | Putting Off Your Budget
As a real estate investor, you’re busy. It can be tempting to keep your budget “in your head” because it feels like a waste of time better spent elsewhere to spend a few hours writing it down on paper. However, having a budget is, in my experience, the top determinant for real estate investing success. Do not base your decisions on guesswork; know where you are and where you are going.
Furthermore, track your progress. A budget is a great way to establish benchmarks for performance. By meeting, beating, or failing your budget, you will be able to determine what decisions should be repeated and which ones should be reevaluated. If you’re not tracking your progress, however, you will have no idea which decision is which.
Mistake 3 | Permitting Yourself to be Disorganized
Real estate investors often work out of a home office or even a vehicle. They’re constantly on the go. As a result, they may not have a central location for records, receipts, and bills, which can lead to poor recordkeeping and missed payments, which hurt your valuable credit. Speaking of your vehicle: Are you tracking your mileage? A simple spreadsheet that you keep in your car (it’s okay in this case) will help you monitor the miles you put on your personal vehicle for business.
Quick Tip: Set up a Dropbox account for your records. Use your phone to take pictures of receipts and other paperwork whenever you need to record things on the go. Upload those images or scans to the Dropbox account to create electronic records in real time.
Mistake 4 | Taking It Too Easy On Yourself
Real estate investors know the importance of bookkeeping, but so many of them simply opt almost unconsciously to forego it. It is not because they are uneducated about the importance of bookkeeping, but because they are overwhelmed and excuse the bookkeeping as the one thing they will allow themselves to get to later. Do not permit this temporary lapse in judgment! Proper bookkeeping enables you to identify your business’ strengths and weaknesses, obtain business loans, and get solid financial advice when necessary. Furthermore, if you ever hope to be acquired by a larger operation, you will have to be able to clearly show the value of your business, which is done by literally opening your books to the potential buyer.
Mistake 5 | Being Too Hard On Yourself
Don’t worry: We couldn’t end on a sour note like #4! Far more often than being too easy on themselves, investors are too hard on themselves. They believe that they should be able to do everything, and that makes it particularly difficult for them to delegate. Your time has value, so use it where it is put to best use. Odds are that best use is creating fantastic returns in real estate, not keeping up with the books. Give yourself permission to let the minutia go. You should always be fully aware of how your finances look, but it’s okay to let someone else organize them.
Make A Plan and Stick to It
As soon as you decide to go into business for yourself, you should make a decision about how you will handle bookkeeping. Whether you plan to track your own expenses to start and hire a bookkeeper later or would prefer to never fill that role at all, you must have a plan in place. If you have been committing one or more of these common mistakes already, don’t worry. Bookkeepers can actually go back and recreate legitimate, professional records where you failed to keep them! The most important thing is to have a plan for your business books and stick to it.
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