Beginner’s Guide to the Basics of Real Estate Accounting

Real estate is one of the largest industries in Washington, and it involves transactions of millions and billions of dollars every day. Therefore, it doesn’t matter if you are a small-time real estate agent or a massive real estate business; you won’t be able to run your business smoothly if you can’t manage your finances effectively.

Therefore, you need a good understanding of how real estate accounting works to ensure that you are able to take control of the real estate accounting challenges. Alternatively, you can also hire a real estate accounting firm in Seattle, Washington, to take care of the accounting for your business. 

Things you must track in a real estate business

Whether a real estate business or any other, the key to success is to track the various factors that contribute to business revenue. Following are some of the basic factors you should keep a constant eye on to assess the performance of your real estate business.

• Income from various sources

  : Real estate businesses, especially real estate agents, can generate massive income from commissions. Therefore, it becomes important for real estate businesses to monitor, track, and report income from different sources.

• Office-related costs

  : Real estate businesses have to pay for various equipment, office supplies, and various other administrative tools. You will also have to handle expenses like office rentals, cleaning and maintenance services, event spaces, and much more. 

• Association fees and other expenses

  : Depending on the number of employees, a real estate business has to pay a considerable amount of money towards salary and incentives. The amount is considered an expense, which needs to be monitored closely, along with other expenses like membership fees to national organizations and associations.

• Marketing costs

  : Marketing and advertising are important tools for real estate businesses to reach potential customers. Therefore, it is important to track website traffic along with social media reach and engagement, newspaper advertisements, business cards, digital advertisements, event sponsorship, etc., to ensure optimum business performance.

• Travel, transportation, and mileage

  : The real estate business involves a lot of movement from one property to another for closing a deal, speaking with clients, or checking out and monitoring the properties. Therefore, tracking the expenses of traveling and transportation becomes important.

Understanding the need for accounting in real estate

Accounting plays a vital role in tracking the incomes and expenses of a real estate business and ensures a clear overview of the cash flow. Following are some common reasons why accounting is vital for a real estate business-

• It provides the actual perspective of the financial situation of the business
• Lets you compare the year-on-year performance to assess the growth 
• Accounting facilitates effective cash flow management 
• Ensures compliance with tax regulations
• Ensures advantages of tax deduction benefits
• Timely payment of outgoing expenses
• Maintenance of day-to-day accounts and transparency in the accounting process

Best practices for a real estate business 

Following are some of the recommended practices that can allow real estate businesses to organize their finances.

• Regular review

  : Ensure that you review your incoming cash and outgoing expenses every month, as it will allow you to identify the errors in your accounts and take preventive measures in a timely manner.

• Accurate reporting procedure

  : You must ensure accurate financial data through reports like profit and loss statements, income statements, outgoing expenses, tax documentation, etc.

• Separate business and personal funds

  : Avoid lumping your business income into your bank account, as it will lead to confusion and mismanagement. Create a separate business account to keep track of every business transaction.

• Itemize outgoing and incoming transactions

  : If you itemize your financial transactions, it will save you a lot of time while preparing taxes and defining the business itemizations in the IRS Schedule E.

• Learn about the regulations

  : It will help a lot if you familiarize yourself with the local regulations along with state and federal regulations regarding income, taxes, and licensing.

Mistakes to avoid in real estate accounting

Here are some common mistakes that you should avoid in the real estate industry.

• Always create a backup of your business data
• Never lump all the expenses together; itemize them to maximize the tax benefits
• Never underestimate expenses
• Always reconcile accounts
• Have an exit strategy in place
• Never mix personal and business finances

Wrap up

The real estate industry requires subtle accounting solutions to ensure perfect financial record-keeping and compliance with local, state, and federal laws and regulations. However, real estate accounting can be very confusing and challenging in the absence of proper knowledge and experience. Therefore, it is always a good idea to outsource real estate accounting to an expert accounting firm.