Do you want to thrive in the real estate market? The only mantra to succeed in this industry is “keep abreast of your accounting operations!” Many real estate dealers overlook finances and when any tax reform is introduced by the government, handling books becomes quite painful for them.
Keeping in mind all the facets of accounting, real estate dealer have to avoid these six accounting mistakes that may create havoc in your business:
1. Not maintaining a back-up on a regular basis-
This could be a nightmare for real estate owners. If you have already experienced this havoc in your business, then you might have understood why I labeled this as “nightmare.” In case your technology fails or you close your document without saving, or the computer crashed mid-evening, or a virus cleans out your drive — all these incidents can cost you partial or overall loss of many weeks or even months’ worth of struggles. Is it not a nightmare?
According to numerous reports, 44% of data loss is caused due to deletion of certain files by mistake, or software corruption or system crash. However, maintaining a back-up is not cumbersome so don’t try to overlook this aspect and move further as the consequences may change your business model upside down in no time.
2. Improper managementof financial records-
You know financial lenders kill a lot of deals every year. Why? Because they often use tax returns to verify the property’s cash flow. Thus, you have to understand this and react accordingly. Make sure that the tax return for the year before the sale is taken into consideration whenever you are seeking loans.
Try to control your expenses to reduce or eliminate your taxable income. If possible, sell properties to buyers as per your net operating income. Don’t forget to classify your expenses appropriately by deprecating your tenant improvements and capital expenses.
3. Classify appropriately
Accounting has its own nuance and making mistakes is common in this process. But one common error occurs from not knowing what contributes to capital expenditure as opposed to repair and maintenance process. Many commercial real estate pros end up overestimating or underestimating their tax liability.
Furthermore, major renovations, modifications or breakdowns can also sometimes trigger an audit of your bookkeeping process.
4. Closing cost calculation
In general, closing costs mean the expenses beyond the buying price approved in the contract, which have to be paid by the seller or the buyer of the assets. According to experts, clients usually fail to estimate the closing costs or closing adjustments.
Property taxes, loan origination fees, title insurance or appraisal fees are some of the funds that you may encounter when escrow process begins. You may not realize how much these funds will cost you initially as it may lead you to debts forever.
So whenever you are selling the property, you should give a brief of overhead cost to your clients and calculate the price that you have to pay so the tax department doesn’t knock your door for audits.
5. Prepare a well-structured contract
Don’t forget that the real estate industry is a highly regulated and taxed sector in the business environment. Developing a viable accounting and tax strategy can be of great help to attain success in your profession as accounting blunders may appear trivial, but can cost you millions.
Pros sometimes forget about drafting a contract that mirrors their work, but unfulfilled promises to clients can take you nowhere and only bring reputational damage to your real estate business!
6. Allowing inexperienced staff to manage the books-
Considering the budget constraints, you may call upon an inexperienced team to handle your books and do tax return preparation for you. But while saving costs, you will lose out in business. An untrained employee, who doesn’t know your domain and accounting principle applicable to your real estate business, can create havoc in your business.
Thus, it is advisable to hire the right qualified people with years of experience working in your business domain.
