Overview
Do you constantly feel like you’re super unclear on your numbers? Numbers per deal? Numbers for your business as a whole?
Are you really good at analyzing deals pre-acquisition but don’t necessarily analyze past performance?
Or, maybe you hired a Fractional Chief Financial Officer (CFO) or Tax Advisor recently and they couldn’t do much for you with what you provided them (or, didn’t provide them)?
If so, the root of each of these super common problems is most likely not having accurate and up-to-date financials (aka bookkeeping records) in place.
So, whether you plan to get your financials together and maintain them on a monthly basis yourself or hire a ROCKSTAR bookkeeping professional to do so for you, the shortlist below of the Top 5 Bookkeeping Mistakes Flippers Make & How To Fix Them will be very important and super helpful for you.
No Time? Here are the Key Takeaways
- Treat your real estate business like an actual business and don’t commingle funds.
- Get clear on how your tax strategy plays into your larger goals and don’t use your business as a personal piggy bank.
- Properly categorize transactions or hire a professional who knows what they are doing (like…yesterday). This way you have accurate & up-to-date financial information to use when making strategic business decisions.
Mistake #1: Commingling Funds
Commingling and not abiding by the entity structure you have in place are probably the biggest and most frequent mistakes we see Flippers make.
This introduces unnecessary complexities and inefficiencies within your bookkeeping. If you hire a bookkeeping professional commingling funds will likely drive your bookkeeping fees way up.
Not to mention, this also drives your financial team members absolutely nuts and may make them not want to work with you.
How to Fix this Mistake:
Personal vs Business Expenses:
- Only pay for business expenses using your business accounts.
- Keep your personal accounts and transactions totally separate.
Business vs Business:
- Don't commingle transactions/funds with any other business(es) you own.
- Refrain from using one entity to pay for another entity’s expenses.
- If you have multiple entities (such as a holding company with subsidiary entities) and need to transfer funds between entities, ensure you abide by your entity structure when doing so.
- If one of your entities is going to issue a loan to another one of your entities, ensure you have proper paperwork detailing the loan (promissory note at a minimum) just as you would if you were issuing another business owner a loan.
Set up your business entity, get an Employer Identification Number (EIN), and open some business bank accounts and credit cards (we recommend
Relay Bank). Use these accounts and only these accounts for your business transactions.
Mistake #2: Using Your Business As a Personal Piggy Bank
That round of golf and drinks with your buddies on Saturday or treating yourself to a spa day most likely doesn’t qualify as a business expense.
On the tax side, the best tax strategy is not always about deducting everything (even personal expenses) to get your taxable income to zero.
How to Fix this Mistake:
Do not pay for expenses that are very clearly personal expenses using your business accounts.
The original intent of the activity has to be for business and everything should be documented (who, what, where, when, why) in case you get audited one day.
What's Your Tax Strategy?
You also need to figure out what tax game you’re playing.
For example, let’s say I want to be able to qualify for conventional financing to purchase my next primary residence as an entrepreneur.
A bank is going to look at my two previous tax returns as an entrepreneur. If I don’t have any taxable income to show, I’m most likely not going to qualify for any conventional financing unless it was depreciation that knocked out my taxable income rather than actual cash expenses.
Knowing this, maybe I have $20,000 worth of business expenses over the course of a year that I could legally deduct within my business, but the transactions could be considered personal expenses as well.
There's an argument for both.
In this scenario knowing my specific situation of wanting to qualify for conventional financing to purchase my next primary residence, I will most likely choose not to deduct those expenses. With my goal, it makes more sense not to deduct them so I can keep that $20k towards my bottom line (net income –> taxable income).
Again, this is regarding actual cash expenses, not paper losses like depreciation. Banks usually add depreciation back into your income.
Mistake #3: Improperly Categorizing Expenses
We see a lot of Flippers categorize property-specific transactions to income statement (Profit & Loss) accounts rather than the appropriate balance sheet accounts.
How to Fix this Mistake:
In Quickbooks or Other Accounting Software
- All property-specific flip expenses should be categorized to what we call “flip inventory asset” accounts on the balance sheet. Flips are considered “inventory” until they are sold.
This is important because Flippers cannot take deductions for expenses incurred for flips until the flip is sold. So, "active" flip properties hang out on the balance sheet as "inventory" until they are sold.
This really comes into play when active flip properties transfer from year to year. The flip should move into the next year as inventory on the books to prevent deductions being inaccurately taken in the prior year before the flip is sold.
- Once the flip is sold, you will conduct an “adjusting journal entry” to move the inventory balances from the balance sheet over to cost of goods sold (COGS) accounts on the income statement.
- So, you’re left with what the flip sold for less all COGS that results in your profit (net income) for the flip property.
In FlipperForce
With the FlipperForce platform you can use the Accounting Dashboard to see the "Sold Date" and the year the property was Sold.
Since you only pay taxes on house flips in the year the property was sold, the Accounting Dashboard will be a valuable tool for seeing how much profit/loss you've made across all of your flips in a given year.
For example, in the Accounting Dashboard below you can see we sold 2 properties in 2023 for a total profit of $115,598.
Mistake #4: Not Properly Entering Purchase & Sales (journal Entries)
We commonly see Flippers only record the cash-to-close transaction for purchases & sales which doesn’t tell any of the “story” of the purchase or sale of the flip property.
How to Fix this Mistake:
In Quickbooks or Other Accounting Software
Every single line on the HUD/ALTA/Settlement statement for the flip property purchase and the flip property sale should be recorded in your accounting software via a journal entry. Then, the journal entry should be matched to the cash-to-close transaction within the bank feed.
This single cash-to-close transaction is normally made up of 20+ other transactions that are contained on the HUD statement.
These are real transactions that have occurred for the flip property and should be properly recorded within your bookkeeping records.
Itemizing each individual transaction on your HUD Statement is important because these transactions factor into the profitability of your flip.
The cash-to-close amount when purchasing a flip property is not an “expense”. It’s the cash required to purchase the property. If you only record the cash-to-close you will never know your true profitability.
And, the proceeds at closing from selling a flip property is not the "income". The proceeds only factor in the transactions happening at the closing rather than all the transactions the flip property has experienced leading up to that point.
In FlipperForce
With the FlipperForce platform you can breakdown your HUD statement to categorize them to the appropriate Categories.
For example, on your HUD statement you will likely have a breakdown showing the amount paid for the initial Purchase Basis, plus other costs such as appraisal fees, inspection fees, title fees, pro-rated property taxes, etc.
All of these costs should be itemized and categorize to the appropriate Purchase, Buying & Holding Cost categories.
Mistake #5: Waiting way too long to hire industry-specific financial team members to help with all of this and more
We have Flippers come to our firm all the time who haven’t filed taxes in 2+ years and also don’t have bookkeeping records for those years.
They are truly flying blind operating their business. They have no way of knowing how their business is doing financially as a whole or deal to deal.
They don't have the data they need to make informed decisions within their business. They also don't have the data they need for financial professionals to help them with crucial services like tax strategy, cash flow management, financial key performance indicators (KPIs), etc.
How to Fix this Mistake:
- If this is you, you can’t afford not to hire a great REI-savvy Bookkeeping Professional ASAP!
- Once your bookkeeping records are caught up, then you should consider hiring a great REI-savvy tax filer (CPA/EA).
- Once your tax returns are knocked out, ensure you retain the ROCKSTAR Bookkeeping Professional for ongoing monthly support so your books stay accurate and up-to-date throughout the year.
- This is when your business will really take off due to you being able to make strategic decisions for your business based on real data.
Looking for a Bookkeeper? Look No further! Reach out to Time Capital Bookkeeping for a discovery Call!
