RECEIPT MANAGEMENT
As a Real Estate Investor, tracking expenses with receipts can be a daunting task. In many cases you may be working on multiple projects at different phases, which could cause some confusion and the loss of financial direction on a project. In the past, you were required to manually track these activities, but without a system it was almost impossible to do. Today, things have change with the use of software and the process yet still very important, has become much easier.
Key benefits of maintaining an organzied accounting system:
- Determine the anticipated cash flow on each project.
- Note your higher performing properties to duplicate effort.
- Make educated decisions.
- Track your NOI (Net Operating Income) to benchmark your performance.
- Use historical performance data to measure new strategies.
- Recognize all expenses to maximize your deductions.
- Avoid IRS penalties for miscategroized or undocumented expenses.
5 TIPS TO A GOOD RECEIPT MANAGEMENT SYSTEM
While this tip may be elementary to some, it’s a mistake made by many. Opening a business bank account will help protect your personal assets, while saving you time and money. Using a business bank account creates a solid foundation for your real estate business. It reduces your risk, makes bookkeeping easier and more accurate, and helps ensure you keep all your personal and business finances separate.
Keep your personal and business expenses completely separate (bank accounts, credit cards, and debit cards). This is because of Tax Liability and Asset Protection. Commingling funds could cause you to lose your protection of personal assets, so be careful. It also makes it easier to claim every possible deduction, which will reduce your tax burden – saving you money.
The most obvious reason for this tip is because you’re not required to keep originals. You can copy multiple receipts to one page, for easier filing purposes. Most accounting software can scan receipts, making them searchable. The software can also link receipts to your bank and credit card transactions, helping you stay totally organized and ready to defend your expenses. Also Make note of which property the receipt is for and what the purpose of the expense is. This will make categorizing your receipts much easier.
The point of documenting income and itemizing expenses for your real estate is so you can determine your taxable income. The lower your taxable income, the less you pay in taxes. Rent (plus any additional income) is your revenue. Therefore, subtract relevant expenses from your revenue and the result is your taxable income.
To maximize your allowable deductions, organize your expenses using the same categories the IRS lists on the Schedule E:
- Advertising
- Auto and travel
- Cleaning and maintenance
- Commissions
- Insurance
- Legal and other professional fees
- Management fees
- Mortgage interest paid to banks, etc.
- Other interest
- Repairs
- Supplies
- Taxes
- Utilities
- Depreciation expense or depletion (capital improvements)
- Other
If you only have a few units, you could manage your bookkeeping using a simple spreadsheet. With today’s technology there’s a ton of great software that can help you manage your finances (and your properties).
Accounting/Bookkeeping Software makes it easier than ever to manage your finances and your real estate investments. They can automate repetitive tasks like data entry, saving you time while improving accuracy.
The key features to look for are:
- Connects to your bank account and automatically imports transactions.
- Automatic expense categorization (you still need to check it).
- Receipt management.
- Late payment notifications.
Popular Accounting Software
Quickbooks is the most popular small business accounting software, and Xero is known for its ease of use. Both come loaded with features, like automatic import and categorization of transactions.
Free Accounting Software
There is free accounting software that works for real estate bookkeeping. Wave is great to help you track basic financial data. Akaunting is better if you have multiple units.