In this guide, we’re covering quickbooks for real estate investors. Specifically, we’ll cover some of the best practices, how to set up your books based on your investment type and profile, and how to get help with your real estate investing accounting.
When it comes to real estate investing, you need to know if your properties are properly cash flowing, if your flipping activities are giving you positive return on investment, when you are over-leveraged, and more.
Your financials and accounting will keep you and your business accountable. At a simple level, you may only be accountable to yourself. For example, is your single-property cash flowing?
On the other hand, you might find yourself accountable to shareholders and investors depending on how you acquired capital for property acquisition.
In both cases, it’s important to have a solid understanding of how to use quickbooks and how to use it to grow your investing business.
[If you’re looking for our quickbooks guide for real estate agents, you can check that out here. This guide is for real estate investors specifically.]
Why Real Estate Investors Use Quickbooks
There are three main reasons real estate investors use quickbooks for their real estate accounting needs. First, it’s often the most affordable option. At the time of publication (2023) pricing for quickbooks is as low as $30 per month or $15 per month during promotional periods.
With flexible pricing plans, you can pick the level that matches closely with your needs.
Second reason investors chose quickbooks is the ease of use. In comparison to many of the other accounting options you have, quickbooks has the shortest learning curve and is more intuitive for people to use.
Lastly, there is far more support and information around the internet. There are more videos showing real estate investors how to use quickbooks than there are other alternative accounting platforms like Xero.
What Is Your Investment Style?
Before we dive into some of the tactical steps of using quickbooks for real estate investing, it’s important to understand that your books will require a different set up based on your investing style.
For example, a house flipper will use quickbooks differently than a property manager or landlord. House flipping has different best practices than managing rental properties in quickbooks.
Also, your portfolio size is going to have an effect on how to set up your books. In addition, partnerships or private investors will also affect how you track, record, and manage your debts, cash flows, and balance sheet.
Some partnership deals are property specific. Others are investments into the real estate investing company rather than the properties.
We’re going to cover some of these at a high-level, but your best approach is to consult with an accountant or take the next step and go through a real estate accounting bootcamp focused on real estate investing.
Quickbooks For House Flipping
For house flippers, the proper way to use quickbooks is like a retail business would or any business with inventory.
Essentially, house flippers purchase inventory, make some improvements, and then sell the property after a specified holding period.
Those who are rehabbing and flipping houses need a way to properly record expenses and costs into a cost of goods account that is realized upon the sale of a property.
Posting expenses directly to a cost of goods account or expense account do not follow generally accepted accounting principles and can create some tax issues down the road. For example, if you expense $100,000 in repairs one year for a net loss of $50,000 and the following year you report the sale of the property for $150,000.
Your tax situation would look something like this:
- Year 1: ($100,000)
- Year 2: +$150,000
At current tax brackets, you could get hit with a large tax bill in the second year. Plus, there are rules around carryover limits.
It’s best to match our cost of goods and expenses with realized revenue when it comes to flipping.
So, in this case, our profit and loss statement would look more like this:
- Year 1: $0
- Year 2: +$50,000
Of course, our cash flow statement will look very different. This example highlights the difference between cash accounting and accrual accounting.
Your house flipping projects should closely match best practices with inventory management.
Classes, Projects, And Products
There is some debate around how to track rehab costs and house flipping projects. Most methods that you will find around the web include the use of classes, projects, and products.
Or, some variation of the three.
For example, in one recommended method, house flippers should use customers to create projects where they can assign products and services associated with the flipping project. This allows real estate investors to gain insights into their rehab projects and costs.
However, quickbooks will record an ongoing loss. If the property isn’t sold in the same year, it creates extra work for aligning rehab costs with the sale of a property come tax time.
Other alternatives involve setting up each house as a product. As you incur rehab costs, you would increase the cost of goods sold for the property. This allows for investors to match expenses with revenue.
Unfortunately, this method lacks a level of reporting detail that is critical for investors. The method is often more suitable for the house flipper that completes only a property or two per year.
There is no one-size fits all for those in house flipping. Your best bet is to work with a qualified bookkeeper or take some real estate investing accounting courses to learn the method that is right for you.
Quickbooks For Landlords
The biggest difference between landlords and house flippers is how rehab costs are recorded. In the case of house flipping, we post rehab costs to the cost of goods account.
When it comes to being a landlord, we need to post our rehab costs to a fixed asset account where we will incur depreciation over the lifetime use of the property.
You have two options for depreciating your rental property. The simplest method is a straight-line depreciation.
Alternatively, landlords and buy-and-hold investors can use cost segregation depreciation. This method is a bit more complex and may require the help of a good real estate investing bookkeeper.
Your average bookkeeper or accountant is likely going to persuade you into straight-line depreciation. Not necessarily because it’s better for you, but because it is easier for them.
A majority of repairs made during the operation of the property will go under the expense accounts and show up directly on your profit and loss statement.
If you’re unsure whether a repair should be expensed or depreciated, then consult with your accountant or bookkeeper.
Setting Up Rental Property In Quickbooks
The best practice is to set up your rental properties as a class. This will allow you to pull a profit and loss statement for the various properties.
Every recorded transaction will have the associated class, or property assigned to it. For example, if you have a plumber repair the toilet for a total of $250, it would be assigned to a specific property.
When you pull your profit and loss, it will show the expense against that specific property. All rent income should be recorded to the associated property class as well.
Just as house flipping, there are other ways to do this. If you are operating a rental and flipping real estate investing business, then property classes may not be the best choice for you.
You may need to use customers as the property addresses. It really varies on your real estate activity and investing type.
What About Different LLC Structures?
It is common, especially for landlords, to set up different limited liability companies (LLCs) for their individual properties. Many experienced real estate investors do this for asset protection.
As a result, it’s only natural to wonder if you can combine all of the separate properties into a single quickbooks account or if you need to create separate accounts.
If you’re using classes as your rental properties, you can likely combine all of your rental properties under one quickbooks account.
Shared expenses would be split to the various classes. For example, let’s assume you have four properties and you use software to manage rent payments. The software bills you $100 per month, regardless of rent payments processed.
You can assign each property 25 percent of the expense. Each property will have $25 associated with the account.
If you have different partnerships, I recommend creating separate accounting books. For example, say you purchase property A with investor A and property B with investor B. In this case, it’s a good idea to keep separate accounts to avoid any future problems.
Real Estate Accounting Bootcamp
Given the different investment styles and business types, it is impossible to cover every single tactic in detail through a simple blog post.
Instead, every single real estate investor needs to go deeper in their quickbooks training and skills. One of the best ways to do that is through a real estate accounting bootcamp that is specifically built for real estate investors.
Alternatively, you can work with a bookkeeper and accountant that works exclusively with real estate investors, whether that’s a house flipper, landlord, buy-and-hold, or wholesaler.
