Real estate is a highly lucrative and diverse business. It includes the sale and purchase of properties, construction, renovations, and buying properties to rent them out. One of the best things about real estate is that it mostly remains unaffected by weather conditions.
The real estate business is highly competitive. You must claim every inch of advantage to be successful in the long run. Many real estate companies do well in sales, but poor record-keeping lets them down, lowering their profits.
Any business must ensure that their books of accounts need to be in an immaculate condition. Well-kept books allow the real estate company stakeholders to better understand the state of affairs and move in the right direction.
There are some technical aspects to real estate bookkeeping. It is a difficult job where the margin of error is minor and chances of a mistake are aplenty. Here are some common bookkeeping errors and tips on how you can avoid them.
Hire a Bookkeeper with Real Estate Experience
Bookkeepers are seasoned professionals in the field of accounting. They are well adept at the prevailing general finance-related laws. However, each industry has its own norms and practices. There are some particular needs of real estate practices that your bookkeeper should be aware of.
Ideally, hire someone with considerable experience in real estate bookkeeping to avoid issues in the longer run. Such hiring will help you smoothen operations from day one and prevent errors and potential penalties due to those errors.
Tracking Commissions Separately
Commissions are a significant source of income for most real estate businesses. They must be accurately recorded to avoid extra taxes and other issues. Trafficking commission separately from the accounting process can lead to mistakes and confusion.
It is crucial to create a separate head for commissions in the books and ensure that they’re only recorded when the deal has been completed. The commission should be recorded with final documents signed, and the keys have been handed over to the new owners of the property.
The eventual commission is based on several parameters which can change at the end of the transaction and should only be recorded once it is concluded.
Incorrect Classifications
Handling different kinds of transactions can be problematic in the real estate industry. All the expenses made and funds received must be appropriately classified with the proper treatment in the books. Incorrect classifications can lead to problems with the auditors and tax authorities since incorrect classifications are a red flag for fraud.
They can also lead to misrepresentation of the company’s current financial condition and financially hurt the business. Some fraudulent businesses try these tricks to lower their tax bill but can land in hot waters with authorities.
Always double-check entries before entering them in the books of accounts to maintain accuracy and avoid any penalties or punishments from the tax authorities.
Reserve for Taxes
Most people in the real estate business come under the category of self-employed. That means you are responsible for filing your taxes each year. It also means that you must have enough money to pay your taxes when the year-end comes, and even more, if you opt for a savings account.
You must maintain a reserve for tax payments each year to stay on the safe side. The reserve may reduce the available cash funds, but it will save you from penalties and late fees in delayed tax payments.
Even if you’re left with extra funds after settling tax dues, you can utilize them towards the business or keep a reserve for the following year. You may even be able to cater to an unexpected business expense.
Delaying Reconciliation of Credit and Bank Accounts
Periodic reconciliations of credit and bank accounts are crucial to avoid issues at the end of the fiscal year. These reconciliations should be carried out every week or every month at the latest. Any further delays will lead to confusion, and reconciliation will become problematic.
If you do not reconcile, your real estate business will have issues. Some people only reconcile their statements when they feel it’s getting out of hand. If you get to that point, you’ve already left it too late.
Personal and Business Expenses
If you own a small real estate business, there is always a risk that you may be mixing personal finance with those of the company. For a successful business, this is a big no-no. People tend to spend more than their fair share profit if they maintain a single account for business and personal expenses.
At the same time, if you use your personal debit or credit cards for business payments, you will mix up your finances. It may seem like an easy task to track these expenses, but it often is pretty complicated. People lose track of the costs and cannot recall them at the end of the day.
You should have a separate business bank account and separate debit and credit cards in your business’s name that you use for official transactions. Separate accounts can also save owners from many legal troubles.
Conclusion
Much like any business, bookkeeping is an essential part of the real estate business. What some people see as mere record-keeping, in reality, helps the management understand the condition of the company and what future actions are required.
As long as the fundamentals are solid, you should not have any significant issues with your accounts. However, if you do not pay enough attention and continue to repeat mistakes in bookkeeping, you will lose money over time.
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