Any business is all about the bottom line. If you are not keeping more than you make, then your business is doomed. Keeping more of what you make is not easy. There is always someone trying to get into your pocket. Learning how to keep more of what you make and keeping people out of your pocket begins with learning what is in your pocket to begin with. Keeping more of what you make has to start with you.
You might have read the title to this post and thought I was going to provide tips about taxes or cost cutting. While those things are important, this post touches on something a lot more basic, knowing what is coming in and what is going out. You might be thinking “well duh”! But you would be surprised at how many I talk to have only a vague idea.
Keeping more of what you make begins with getting your “business house” in order. You cannot just throw receipts in a shoe box to sort out later, or write checks here and there. The receipts will only pile up, money will keep going out and later will never come. A income and expense record with a filing system is a must. This system does not have to be fancy or complex. The key is to just have one and enter data and keep it organized at least once per week. A simple spreadsheet and bankers box may do the trick, especially when you are just starting out.
Start by setting up a simple spreadsheet for each property. At the top, list the source of income such as rent, late fees, or utility reimbursements. In lower rows, list expenses. Develop general categories for your expenses. The real estate expense categories used by the IRS on Form 1040, Schedule E are a great place to start. Doing so will save you a great deal of time and effort when tax season rolls around. You can always adjust your spreadsheet to fit your specific needs as you grow.
And as you grow, you will need to adjust. The record keeping just gets harder and so complex that simple spreadsheets may not be able to keep up. As you grow, you may want to hire professional help or move towards some sort of accounting software such as quickbooks or quicken. Be prepared however, as this step involves another learning curve. You will either be learning about the software or learning what your professional bookkeeper needs. There are also several property management software packages out there that get better and better every day as far as their functionality goes. We have graduated to using Appfolio, but if you are just starting out, such a system is not worth the cost.
Keep in mind also that as you add to your business, in terms of properties, loans, lenders, partnerships, LLC’s and trusts, you will be adding bank accounts, checkbooks, forms, tax obligations and other paperwork. It will all become much more complex. This complexity will include lots of numbers and data that has to be sorted, maintained and reviewed.
It can all be quite overwhelming, especially for someone who does not have any accounting or money handling experience. But keeping close track of what is coming in and going out is a must. If you want any chance at all to keep more of what you make, it will start with you and the systems you set up as you begin and grow your real estate business
Kevin Perk is the founder and publisher of Smarterlandlording.com. He is the author of Advice From Experience To New Real Estate Investors. Subscribe to Smarterlandlording here. Contact Kevin here.
