A Practical Guide to Real Estate Accounting

Know which kind of real estate business you run

Agents, property managers and landlords have different income sources, expense categories and rules. Set up your books to match yours.

• Agents. Irregular commissions, often paid as independent contractors, with large deductible expenses such as marketing, fees and mileage.
• Landlords. Rental income, mortgage interest, taxes, insurance, repairs and depreciation, tracked per property.
• Property managers. Management fees plus handling tenant funds for owners.
• Developers and flippers. Project costs, holding costs and sale proceeds tracked per project.

Confirm tax treatment with a CPA familiar with real estate.

Keep client and tenant money separate

Security deposits and escrow funds are not your income. Many states require them to be held in separate trust or escrow accounts with strict records.

Mixing client or tenant money with operating funds can violate state rules and cause serious trouble. Open the required accounts, reconcile them monthly, and keep a ledger per tenant or client. Check your state's real estate commission or licensing body for exact requirements.

For your own funds, keep business and personal money apart. See separating business and personal finances.

Track income and expenses by property or deal

Record revenue and costs per property or transaction so you can see which ones make money and which do not.

For rentals, record rent received, late fees, utilities, repairs, management fees, taxes and insurance for each property. For agents, tag each commission to a transaction and each expense to a category such as advertising, licensing, travel and software.

Distinguish repairs from capital improvements, since improvements are usually depreciated over time rather than deducted at once. Ask your accountant about the right treatment. See what is depreciation for the basics.

Taxes and estimated payments

Agents and many landlords make estimated tax payments and should set aside part of each payment for taxes as it comes in.

Commission income arrives in lumps, with no withholding. Move a set percentage into a tax savings account every time you are paid. Your accountant can tell you what percentage fits your situation.

Keep mileage logs, closing statements and receipts. Our tips for filing quarterly taxes explains the routine, and tax write-offs for the self-employed lists typical categories.

Monthly reports to review

Review profit and loss by property or deal, a cash balance, rent roll or pipeline, and aging for unpaid amounts.

1. Profit and loss, by property or by transaction type.
2. Cash balances in each account, including trust accounts.
3. Rent roll with late payments, or commission pipeline with expected closing dates.
4. Upcoming large costs such as taxes, insurance renewals and repairs.

See the financial reports to review each month and small business accounting for more.

Cash flow and funding in real estate businesses

Commissions and rents arrive unevenly while costs are steady. A reserve or flexible credit line helps cover gaps.

Illustrative example: an agent with $6,000 in monthly costs closes nothing for two months. A $12,000 reserve covers it. Without one, a line of credit might bridge the gap, as long as closings are probable and the cost is small compared with the commissions waiting.

ROI Funder funds established businesses with 500+ FICO, 6+ months in business and $20,000+ monthly revenue. It does not place commercial mortgages or acquisition loans. A business line of credit or working capital may fit operating needs. Applying uses a soft credit pull.

Hire a bookkeeper or CPA who works with real estate clients if volume grows. The cost is often recovered through better deductions, cleaner trust account records and fewer surprises at tax time.

Finally, build a calendar of recurring dates: estimated tax payments, insurance renewals, property tax bills, license renewals and trust account reconciliations. Missing any one of them is more expensive than the time it takes to set reminders.