Avoid This EXPENSIVE Mistake! Real Estate Bookkeeping and Accounting Tips

Bookkeeping and accounting, everybody's favorite subject. That's what we're talking about today.

Don't click away. This is one of the most important parts of real estate investing. And if you watch this video all the way through to the end, you're going to know enough to go ahead and get started in real estate. I think a big mistake that a lot of people make is they worry so much about how do I account, how do I add all these systems, that they don't get started. So if you haven't bought a first property yet, don't let that stop you. This video is going to get you started.

Welcome back to the channel. This is Cody, me, and that's Christian. And we're talking about accounting.

We've done the thing. Hey, welcome. Um, accounting. So there's a few things that you need to do. The first, and I think the most important that we've learned as far as the most painful lessons, you need to find the right CPA for your business. If you just have a duplex, you bought your first, say, your first 10-plex, you don't need the crazy, most sophisticated person. Yeah, person, CPA, EA, whoever your tax advisor is. It doesn't have to be a god of accounting. You need someone who understands the basics. If you want to build a large portfolio and you're going aggressively at your business, there is a strategy. Find the person in your market who's done what you want to do and figure out who they use and use that person. That strategy has worked well on everything that we've done. It's how we built the portfolio, how we find our legal teams. That is how we found our current CPA. It's the best way to play the game. Who's winning? Copy their strategy.

That's, that's what we do anyway.

Yes, it is.

And one thing to note that's really important in accounting, bookkeeping, taxes, the magical number is zero. It's not super complicated, but you need everything to balance out. If it does not balance, you will lose an audit. You need to make sure everything balances out, it zeros out. You've got your debits, you've got your credits, everything should equal out. There shouldn't be a penny more or less than what you've spent. You need to make sure that everything is accounted for in that bank account. And if there's multiple bank accounts for a business, or for example, in property management, you've got your ownership account and then you've got an account for the property manager. They may pay bills out of that. You need to account for both sides, both accounts, whether they paid out a rent collection or if they have a trust account for your funds. Everything needs to be accounted for. Don't miss that. Yeah.

Now, as far as your preparation, there's a whole bunch of things you need, and we actually have a list in our course on multifamilystrategy.com. But the nuts and bolts of it are you're going to want to have everything related to your transaction when you bought the real estate. So your settlement statement, your operating agreement, and in that you should have everyone's ownership, who owns with you, driver's license, Social Security number, their percentage equity. You want to have all those things laid out. In addition, I put in all the public record information so they can easily look at the transaction, say how much was land, how much was building, how are we assigning value. So I go to the county public records and I just print out the tax data and parcel data for that property and that goes in the initial packet. Next, you're going to need your books for what you actually did for the year. So you should have accounting on the property that is going to be a T12, a profit and loss statement, P&L, general ledger. But all of your bookkeeping documents, everything that you use to track income and expenses needs to go to your CPA. If you used a credit card, which we occasionally have done, use of zero interest credit cards, that doesn't always show up in your bank statements because you're not necessarily paying it off all at once. As you use it. Make sure you itemize every single expense on the credit card so that it falls onto the balance sheet correctly and is accounted for correctly for that tax year.

Yep. And then you'll also need a mortgage statement that'll allocate the interest versus the principal that you paid on any given note. That's important because you get different write-offs if it's principal or interest. Mm-hmm. You know about that. And other than that, you know, if you want to go into deep dive, we talked about it actually today on the mentorship call. We'd love to see you there, multifamilystrategy.com. But this is a high-level overview of things that you're going to have to think about and know as you build out your portfolio.

Now, biggest lessons that we learned along the way here: if you have the wrong accountant, which we have done, for your stage of business, it can be ludicrously expensive. And I'm talking tens of thousands of dollars for us, close to $100,000. I actually combined about $100,000 of things that had we structured different or had different advice, we could have mitigated or deferred. In the build phase of your business, it is the single most important time to minimize your mistakes and preserve cash flow. You need to hold your cash. If you're starting like us with no money, you cannot make the big money mistakes. Six-figure mistakes hurt. Really do hurt. Now, do we have good books? Are we going to pass audits? Yes. Do we want to pay a bunch of money in taxes every year? Absolutely not. You want to avoid that like the plague. Now granted, made millions of dollars, paid $100,000 in taxes. We have a good tax situation. There was a way that we could have played these differently where our tax liability would have been somewhere around $0, which would have been much more comfortable.

Way better.

Yes. Zero is in the budget. So choose your accountant really closely. Keep great books and make sure that you are working with a property manager who does the same. If you are using third party, make sure that everything that they are tracking makes sense to you. You understand it. The last piece of advice I'm going to give is the first piece of advice I gave. Just because there's a lot to learn in accounting is not a reason not to get started in real estate. If you don't have an accounting problem yet, you don't have the right set of problems. Buy the real estate, figure out the accounting. There's a million ways to do it. You can do it on multifamilystrategy.com. You can do it with your local CPA. You can learn it from another investor in your market. Don't let that hinder you, but also when it gets to tax time, do not mess around with it. Keep great books. You are going to be very glad you did.

That's it. So thanks for watching and we'll see you next video.