Accounting for Dummies Like Me
Do you remember in the early 90’s when the “For Dummies” book first came out? In the bookstore, you first saw a few titles dealing with computers (the first book was “DOS for Dummies” in 1991) and then there were numerous titles of those thick yellow and black paperbacks taking up an entire section. I wish I would have picked up “Accounting for Dummies”.
I have made a lot of mistakes in my real estate investing career, but a big one was not educating myself early on the basics of accounting and bookkeeping. Instead, I was self-taught over several years making numerous blunders.
I remember in college, friends enrolling into Accounting 101 thinking it was going to be an easy A and then regretting taking the class or even dropping it before it brought down their GPA. I was majoring in engineering and was always good at math so I thought it cannot be that difficult. However, they scared me enough not to take the class.
When starting your own real estate investing business there is no school or template to follow. In all the courses and seminars, I have attended over the last 19 years, learning accounting and bookkeeping is not stressed enough. Honestly, it is hardly mentioned.
Over the past several years I have had some beginner investors reach out to me for advice. I have sought advice from experienced investors in my career, so I am glad to meet or setup a phone call with them. Now one of my main points of advice I cannot stress enough is to learn accounting and bookkeeping.
Accounting and bookkeeping are imperative for any small business owner. Here are some reasons it is so important.
Time and money
For several years while I was teaching myself accounting and doing my own bookkeeping, I made numerous mistakes. This took more of my time when I could have been looking for deals (read Blog: What is your time worth?). Mistakes are expensive as I had to pay my CPA for more of his time to fix my mistakes.
Working with your Professional Team
Your professional team consists of your CPA, bookkeeper, banker, and real estate attorney and other attorneys. To run a small business, you need to be able to speak intelligently with these professionals. If you are applying for a loan and your banker requests your year-to-date income statement and balance sheet, do you know what those are? How long would it take you to prepare? Some phone calls with my CPA he would suggest a strategy and I simply did not fully understand. This can hinder how to effectively run your business.
Bookkeeping for real estate is different
I have hired several office managers over the years and most of them have on their resume “proficient in QuickBooks”. What I found was they knew QuickBooks but did not know real estate bookkeeping. Most businesses’ books are income in + expenses out = net profit. However, in real estate you have multiple properties/assets that need separate income and expenses for your tax return. Buying and selling property, depreciation, and amortization all need to be entered into the accounting software properly. Most investors as they grow also create multiple entities, so accounting gets complicated quickly.
Managing cash flow to keep your business alive
Do you know someone who was flipping homes or building spec houses and they seemed so “well off” and then they went bankrupt or lost homes to foreclosure? Your initial thought was probably, “how did that happen? They were doing so well.” Most likely the issue was cash flow management. To have good cash flow management you need to know where you stand financially as a business and personally on a weekly basis. When rehabbing or building homes, you have a lot of expenses and then you make your money when you sell the home. Then you need to set aside funds for paying taxes. That check at closing dwindles fast, especially if you are working on multiple properties. Up to date bookkeeping and tracking your funds back and forth to different entities and personally is imperative to stay profitable.
I cannot stress enough if you want to be a real estate investor or currently investing to take time to learn accounting and bookkeeping. Take an online class, read a textbook, or buy “Accounting for Dummies”.