How to Do Accounting for Real Estate Business

There are certain truths you cannot avoid if you want to run any successful real estate business. One of them being that someone has to manage your company’s accounts. While realty companies can vary widely, some are concerned with commercial property, some with residential, some with both, they all have this in common. 

Any person or organization who works in the Canadian real estate industry should know that accounting is a big part of running a successful real estate business. To keep a business’s finances in order it is essential to analyze profits, evaluate success, and track spending.  

If you want to be successful in the real estate industry in the long term, understanding how real estate accounting works is the best tool you can use. 

Whether you’re handling your accounting in-house or hiring an accounting firm to take care of this critical work, you should be up to date on the best real estate accounting practices and understand just how important they are for the future of your realty business. 

The Importance of Accounting For Real Estate Agents

If you want to see success in every aspect of your real estate business ensure that accurate and thorough accounting and financial reporting are a cornerstone of your company’s business practices. 

Real estate accounting allows you to manage, monitor, and evaluate your business’s economic performance through markers such as cash flow, net worth, income, expenses, losses, reserves, and more. With proper accounting, you can better plan your short and long-term budgets and projections. 

All money coming in and out of your real estate business needs to be accounted for so that you can stay organized, focused, profitable, and keep planning for your financial future. If you have accurate accounting, you’ll feel confident making business decisions with the whole financial picture right at your fingertips. 

Though it might seem tedious if you don’t understand how to manage your business’s financial transactions, you’re missing a large piece of the metaphorical puzzle. Good real estate accounting practices allow you to fully comprehend the well-being of your business operations and dream up better company strategies. 

To define and meet your goals and benchmarks, you have to be aware of your company’s performance indicators to keep track of what progress you’ve made and where you might have fallen short. 

Accounting can help you identify which properties are performing well and which are performing poorly, provide you with data needed to help raise capital, and show you critical comparisons of your yearly growth rates. With this information in hand, you’ll be better equipped to find financial and organizational success.

Differences Between Real Estate Accounting and Bookkeeping

When discussing accounting for the real estate business, you might stumble upon the term bookkeeping, which describes some accounting practices. As far as real estate businesses are concerned, they represent very different facets of managing your financial operations. 

Bookkeeping for a real estate business might include:

• Dealing with payroll procedures, 
• Keeping records of debit and credit card charges
• Ensuring bank statements and records are accurate
• Dealing with invoices and payment collections. 

In contrast, real estate accounting deals with a much broader scope of responsibilities and procedures that evaluate your business’s financial well-being as a whole. When dealing with accounting for a real estate business, you have to consider many more factors.

Essential things like complying with local and national business regulations, preparing for tax season, financial audits and analysis, and a better understanding of profits and losses all fall under the umbrella of real estate accounting practices. 

While both facets of business finance are pivotal to a successful company, accounting is much more complex and requires different tools and strategies to meet those needs within your real estate business. 

Digital vs. Analog Accounting

Even in the digital age, some people prefer to manage their real estate business accounting on paper. Though many people use digital means to keep their books and deal with their accounts, it’s still possible to go the analog route and be successful. 

Newer businesses might even benefit from manual record-keeping practices as you learn the ins and outs of real estate accounting. Analog bookkeeping does take a bit more time, effort, and organization overall. Without some form of accounting software, you might find yourself spending more time on your accounting practices than you’d like. 

Whatever option you choose, always remember that diligent and accurate accounting practices are the key to your future success in the real estate industry. 

Regulations For Real Estate Accounting

While there are many universal similarities in the Canadian real estate industry, managing a real estate business is essentially a regional, local matter because the rules and regulations might be different based on what community or province you’re working in. 

You must educate and familiarize yourself with the local regulations, laws, and guidelines that are specific to your business’s location and jurisdiction. When deciding how to handle your accounting practices, you must factor in compliance with your local laws and regulations first and foremost. 

Without a full grasp of these rules and guidelines, you will never know the best route to manage your financial, accounting, and bookkeeping needs. 

Real Estate Accounting 101

While real estate accounting deals with a wide array of financial factors, there are some basic concepts that you should know about when dealing with accounting for your real estate business. These are the big takeaways and the first steps in facilitating good accounting practices for your organization and in no way cover the wide spectrum of topics that a real estate accountant would need to cover. 

Even so, it’s important to familiarize yourself with these essential finance tracking habits and practices so that you can understand just how financially healthy or unhealthy your real estate business is.

Commissions

Though commissions are a common part of the real estate industry, that does not make tracking them any less complicated. Most realtors make a commission when a property closes and this is generally their main source of income. As such, you must monitor all incoming cash from commissions for your record-keeping purposes. 

No matter how boring or complicated it might seem, calculating and tracking commissions is just a part of any real estate project’s process. The quicker you can track and record these important financial records, the sooner you can move on to your next project. 

Association Expenses and Fees

Another accounting variable that real estate businesses need to be cognizant of is the costs and fees of various real estate associations based on location and community regulations. Real estate businesses usually have to pay membership fees to national organizations as well. 

Canadian Homeowners Associations (HOA’s) collect annual fees for housing developments and residential real estate which is pooled and sometimes used for community maintenance and activities. These associations use the funds to beautify and enrich their communities and membership in these associations is usually mandatory. 

As HOA’s are legal entities, it is essential to keep track of all the fees and costs associated with them and ensure your real estate business is compliant with all their regulations and expenses. If you don’t you might find yourself spending unnecessary time and money to fix such oversight. 

Costs of Continuing Education

To manage a real estate business, you’ll have to ensure that all realtors maintain a real estate license and keep track of all the associated costs and fees per year. You’ll also have to keep an eye on license renewals and continuing real estate education classes. 

Real estate certification, applications for licenses, licensing exams, and errors and omission insurance all cost money, as do the professional development courses that make up the continuing real estate education curriculum in Canada. 

Courses can include a self-study format, live webinar, or in-person learning, and the tuition for such courses will vary depending on the length of the course and how students receive it. Whatever method is used, accurate accounting is still critical for real estate businesses. 

Office Related Costs

While many real estate businesses operate in a digital, mobile format, some still work out of brick and mortar establishments and have to stock their offices with supplies and spend money on office expenses every year. Though mundane, keeping track of these office expenses is an essential part of your overall financial picture, no matter how big or small the costs might be. 

Office supplies can range from writing utensils, printer paper, binders, sticky notes, staplers, cleaning supplies, and even toiletry supplies like soap and bathroom tissue. 

Keeping track of any tangible and physical item bought for your office is essential for expense records and tax purposes. As well as bigger expenses like event spaces, utility services, and office rentals.

Marketing Budget

As with any business marketing and advertising, costs are major pieces of your overall financial picture and need accounting for your real estate business. Real estate professionals use marketing and advertising to communicate with their communities about just what services and products your business offers their residents.

Things like event sponsorships, print and newspaper ads, digital marketing, social media management, website design, and business costs are just some examples of the many things that fall under the category of marketing costs. 

To market effectively, you need to know how much you spend on marketing and advertising, how much profits these expenses net you, and how your marketing practices affect your business on the whole. Good accounting practices help you do that, and without them, you might waste lots of money on ineffective marketing every year. 

Transportation, Travel, and Mileage

In the real estate industry, it’s not uncommon for realtors to travel from property to property in their network to engage with clients and ensure that their properties are up to standard. This means a lot of time and a lot of travel. 

Keeping accurate records of mileage, transportation, and travel costs can save you a lot of time and money in the long run and ensure the financial well-being of your business. 

For smaller real estate companies, this might not be so hard, but large companies with more real estate professionals might find it a bit more complicated and confusing to keep track of the various moving parts that come with transportation costs and bookkeeping.

Retain professional accountants if you feel it’s too difficult for your company to keep these records yourselves. 

What Does Good Real Estate Accounting Look Like?

Knowing the importance of real estate accounting and understanding the basic concepts are only the first steps in assuring your company is keeping up with the best accounting practices for real estate companies. 

Once you’ve figured the first two out, then comes the hard work of actually implementing these procedures into your day-to-day business. If you want to stay organized and financially responsible, these are the practices you should be using in your organization. 

Itemize Every Single Transaction

If you’re not correctly itemizing your real estate business’s financial accounts, you might find yourself extra stressed out every tax season and beyond. Without itemization, you can end up spending a lot of time and effort trying to fix your organization’s financial situation. 

To avoid this, practice good itemization patterns and habits to help make this part of real estate business accounting a breeze. 

As stated before, itemizations and deductions can vary from region to region, so be sure to familiarize yourself with local guidelines on business itemizations and deductions to better manage your income streams and expenses. 

Ensure Your Financial Reports Are Always Accurate

While it may seem like an easy decision, it’s important to mention how serious, accurate reporting is when dealing with real estate business accounting. Your numbers cannot be inaccurate, ever. Be one hundred percent certain you reported the company’s financial data correctly.

Without accurate data, you won’t be able to successfully handle tax documents, profit and loss statements, applicable income streams, and your outgoing cash flow. While manual accounting practices might limit you on what reports you can create, automated software makes sorting and analyzing lots of data in a short amount of time much easier. 

Utilize Monthly Reviews

Even if you do opt for an automated accounting system, it’s still important to continue monitoring and making regular check-ups on your account to avoid oversight and ensure they are well kept and secure. 

Keep Business and Personal Funds Separate

While it’s important to keep track of things like commissions and other income sources, it’s also important that you don’t throw them all together into a general bank account. This can lead to organizational and financial nightmares down the line. 

You should create separate business and personal accounts to keep track of every transaction. This isn’t much of a hassle either, as you can still connect your business and personal accounts and transfer money between them on a scheduled basis. 

Keeping these accounts separate has another benefit in making them easier to connect with any accounting software or platform you might choose to use. 

This is also true if you choose to hire a financial manager or an accounting firm. You can set up monthly meetings to review your financial reports and information and ensure you’re getting the services you pay for. 

If you find inaccurate numbers, you can find errors and omissions in your accounts, and always ensure that you’re on top of your financial information. This way you can quickly mitigate damage and keep your company’s finances in order. 

What Are Some of the Most Common Real Estate Accounting Mistakes?

In an industry as complex as real estate, it’s common for inexperienced parties to make mistakes in their accounting practices. The more you learn and get accustomed to managing your financial records, the better you’ll be at avoiding these easy flubs and missteps. 

Keep these common real estate accounting mistakes in mind whether you’re just getting started or have been learning about the best real estate accounting practices for a while now. 

Back-Up All Your Files

Be sure to back up your records, date, and financial files all the time. Even if you store your information on a cloud-based system, you’ll want to ensure that it has an automated backup feature and that it is turned on.

If you’re managing your accounts with spreadsheets or paper files, make sure you’re using a duplication system and always keep copies of this information on hand. 

Communication Is Key

It’s vital that you effectively communicate with any relevant party in your real estate business transactions. There can be tons of moving parts when it comes to closing real estate deals, and you should never assume that any of these various individuals are aware of what documentation is needed. 

Be sure to communicate what will be needed and even provide reminders about tax statements, new documents, and anything that might be necessary for a real estate sale or transaction. 

Don’t Release Funds Too Early

Disbursing funds is also very important, but you have to be sure not to release them too early as this will make a brokerage non-compliant with most of the bodies entrusted to oversee such guidelines.

Until you exchange the keys, sign the proper documents, and the deal is one hundred percent guaranteed, make sure that you’re not sending any funds to any parties prematurely. Being extra careful about this can save you a lot of trouble in the long run. 

Lack of Training and Experience

While it might be tempting to hire a personal connection to handle your accounting, remember that for your business to be successful, you should employ a trained professional who understands the real estate industry and the best accounting practices for that industry. 

Real estate accountants should know all about commission splits, expenses vs. income, payroll maintenance, tax regulations, deadlines, and more. In an ideal situation, they will have specific and impressive experience in commercial and residential real estate accounting. 

Accountants without knowledge of real-estate-specific practices might find themselves overwhelmed by even the most helpful and intuitive accounting software when dealing with real estate accounting. 

Work Smarter, Not Harder

I know that all of this might seem very intricate and maybe disheartened, but don’t worry so much. With a little help, you can easily organize and manage accounts for your real estate business and see just how much it can aid in your company’s success.

There are tons of user-friendly accounting software available that make keeping up with your financial information easier than ever before. You can find them at every price level and most have cloud-based technology meaning your accounting information could be available at your fingertips, wherever you need it. 

You can also hire an accountant or a consultant to do the dirty work for you. Investing in a financial manager could save you a lot of time and earn you a lot more profit over time. A professional accountant who is familiar with the real estate industry’s standards and practices might be worth their weight in gold to your small business.

Some Final Considerations

As you can see, in the real estate industry, like every other industry, accounting plays a huge role in the success or failure of any given company or organization. Accounting is the backbone of a thriving real estate company and is essential in optimizing a business’s financial resources. 

Failure to incorporate good accounting procedures by real estate professionals is a sure-fire way to get in over your head and spend a lot of time and money cleaning up your own mistakes and omissions. If you want to avoid those painful financial losses, accurate and efficient real estate accounting is a must. 

Good accounting practices in your real estate company can mean the difference between making and losing a fortune in the realty business. Real estate investors that have a good knowledge of accounting have a much higher chance of success than those who don’t. 

If you’d like to fall in the former category and not the latter, you must understand the tenants of real estate accounting and why it’s so important for your real estate business. You can’t afford to.