Property Accounting and Financial Reporting: Best Practices for Real Estate Professionals
Real estate accounting and financial reporting are critical functions that real estate professionals must master to manage their property portfolio successfully. It involves keeping accurate and detailed financial records of income, expenses, and transactions related to real estate assets, while financial reporting entails communicating the financial performance and status of the portfolio to stakeholders.
Implement Accrual Accounting
Accrual accounting is the preferred accounting method for real estate professionals because it provides a more accurate picture of the financial performance of the portfolio over time. Unlike cash accounting, which only records transactions when money changes hands, accrual accounting records income and expenses when they are earned or incurred, regardless of when the money is received or paid.
“By adopting accrual accounting, real estate professionals can track their revenue and expenses more accurately, which helps them make informed decisions about their portfolio and identify potential issues early on,” says Nick Finkenauer, CPA and MHCS shareholder.
Maintain Accurate and Up-to-date Records
Maintaining accurate and up-to-date financial records is essential for property accounting and financial reporting. This includes keeping track of all transactions related to the property, such as rent payments, repairs and maintenance, insurance premiums, and property taxes.
Also maintaining a detailed and organized filing system for all financial records, including bank statements, invoices, receipts, and financial statements, makes it easier to access and analyze financial data when needed.
Use Technology to Streamline Accounting Processes
The use of technology can help real estate professionals streamline their accounting processes and improve their efficiency. For instance, cloud-based accounting software can help automate tasks, such as invoicing, bill payments, and financial reporting.
“Also using property management software to track tenant information, lease agreements, rent payments, and maintenance requests, can help you stay on top of your portfolio's performance,” added Finkenauer.
Separate Personal and Business Finances
Separating personal and business finances helps you to avoid confusion while ensuring accurate accounting. This includes opening a separate bank account and credit card for business transactions, and avoiding using personal funds for business expenses.
By keeping personal and business finances separate, you are also complying with tax laws and regulations while avoiding potential legal and financial liabilities.
Communicate Financial Performance to Stakeholders
Regularly communicating the financial performance and status of their portfolio to stakeholders, including investors, lenders, and tenants can help to build trust and credibility, as well as identify potential issues and opportunities for improvement.
By adopting these best practices, real estate professionals can improve their operations and decision-making and achieve long-term success.
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