5 Common Bookkeeping Mistakes Made by Real Estate Investors (and How to Avoid Them!)

Owning rental properties can be quite profitable, but poor bookkeeping habits and mistakes can eat away at those profits. You may unknowingly be giving up opportunities for further growth, missing out on allowable deductions, or creating unnecessary stress in your passive income endeavor.

Here are 5 common bookkeeping mistakes I see real estate investors make (and how to easily fix them!)

1. Mixing Personal and Property Expenses
Consistently paying for items with your personal bank account or your personal credit card can create recordkeeping headaches. When recording your transactions in your business, items can be misclassified or forgotten. Not only does this misrepresent the health of your real estate business and create an unclear financial position, the IRS doesn’t take too kindly to taxpayers deducting expenses that are clearly for personal use as a business expense - even if done in error. Doing so could open up exposure to costly audits in the future or missed opportunities for savings.

SOLUTION: Set up separate bank accounts and credit cards for each entity that you own so that the revenue, expenses, and cash flow can be easily determined instead of comingled with your
personal life.

2. Forgetting to Track Small Expenses
While there are expenses that should not be recorded in your business ledger, there are expenses that absolutely should be so that you can maximize your tax savings. Items such as mileage, supplies, subscriptions that are related to the management of your properties are all deductible and can add up to significant savings.

SOLUTION: Track these expenses! There are many apps that will easily track mileage for you and capture receipts for money that is spent operating your business. Download these apps and develop of routine of quickly uploading the information. Having easy access to these will add up!

3. Waiting Until Year-End To Catch Up
I love debits and credits, but even I don’t like a whole year’s worth of transactions staring at me at the end of the year and creating a large project to tackle. It becomes overwhelming to deal with and your memory fades as time passes, so remembering what transactions were for in February is difficult. This again leads to inaccurate records, as well as missed opportunities in adjusting deductions and operations to maximize your profit.

SOLUTION: Create a monthly bookkeeping routine. Review your expenses so they are categorized correctly, ensure all of your rent was collected and recorded, remain in good standing with your creditors. This routine gives you greater clarity into how your business is actually operating.

4. Not Reconciling Bank Accounts
Bank reconciliations provide a clear pointer to anything that is off in your recordkeeping. Mistakes are easily identified and addressed in real time. By not reconciling in a timely manner, it is almost certain your numbers will be off and tax time will require more time and more cost in clean up.

SOLUTION: Reconcile your bank accounts monthly! Bank statements are often generated within days of the month ending. Pull them up and reconcile them to your ledger to ensure accuracy.

5. Doing it Alone for Too Long
Managing the books for one property is absolutely doable, but it becomes much more time consuming when you are managing more than a couple. There are multiple entities involved, multiple bank accounts, mortgages…just more of everything. It becomes overwhelming, it becomes a second job, and it becomes inaccurate.

SOLUTION: Find a professional who can help you! Perhaps you outsource your landscaping, your maintenance work, your property management, outsourcing your bookkeeping and accounting needs are another way to gain some support and ensure your real estate business is running smoothly and profitably. There is no right time or magic number to decide when…just do it when you need help!

Avoiding these mistakes can potentially save you thousands each year. If you’re ready for books that give you clarity, not headaches and want to avoid #5 – let’s chat!