Real estate, in almost every part of the globe, is a booming business right now. It involves a huge number of financial processes and complexities. Because of the operational nature of the industry, the real estate sector needs exclusive standardized processes for accounting. Just like in most other industries, accounting forms the backbone of real estate firms. It allows managing and optimization of financial resources. What real estate professionals and leaders fail to realize is the need to look deeper into the books or let a professional do it – which leads them to suffer losses.
Real estate businesses make a fortune, well most of them. But this fortune can be lost as well without an understanding of how much profit is being generated and how the money should be used to let it grow. From monitoring expenses to analyzing profits, there are many reasons why businesses should get an accounting firm to help them keep growing. Accounting in real estate goes beyond the responsibility of balancing books. If you are a real estate accountant, besides knowing your accounting duties, you also need to be mindful of what’s going on in the industry.
In this article, Finsmart Accounting – trusted globally for outsourced accounting services – will share everything about real estate accounting. From basics to top challenges and best practices to expert insights, we will touch up on everything crucial. Let’s start!
Who needs Real Estate Accounting?
The property industry is diverse and that is why accounting firms need to know who it is that they are bookkeeping for. They should belong to either of the following segments:
– A real estate owner/developer/asset management firm
– If an individual manages properties for clients and handles their accounts
– If they maintain accounts of housing associations
– If they manage a construction company
– If they own a real estate investment firm
– If they provide services pertaining to the real estate industry
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Basic concepts of real estate accounting
The real estate industry is complex in nature and the way it operates needs careful understanding. Here are some of the basic concepts that you need to understand if you are new in the real estate accounting industry:
– Property acquisition and capitalization:
As a real estate accountant, you need to record the purchase of properties and determine the initial valuation. The process involves capitalization of acquisition costs – including purchase price, closing costs, and any necessary improvements that might help in revenue generation.
– Depreciation and amortization:
In the real estate business, you must understand these issues well. Depreciation reflects the gradual decrease in the value of tangible assets, such as building equipment. As a real estate accountant, you need to employ a variety of methods, such as straight-line depreciation or accelerated depreciation, which helps allocate the cost of assets. On the other hand, amortization applies to intangible assets like lease agreements, which helps spread costs over their expected life span.
– Rental income and expense management:
As a part of rental income, accountants need to keep track of revenue streams from leased properties, including rent payments, late fees, and other additional income. Real estate accountants also have to keep an account of operating expenses, such as maintenance, utilities, property taxes, and insurance to calculate the net operating income.
– Financial reporting and compliance:
Real estate companies must meet their industry-specific accounting standards, such as Generally Accepted Accounting Principles, or International Financial Reporting Standards. For accountants, it is important to maintain accurate financial reporting which is important for stakeholders, like investors, leaders, and regulatory bodies to assess the financial health and performance of real estate assets.
Top Challenges of Real Estate Accounting
Being a booming industry, the world of real estate accounting is not devoid of challenges. Some of the top ones include:
– Incorrect Classification of Expenses:
In real estate, accountants often find themselves stuck in trying to classify expenses under different sections. It is very important to remember the basics – never mix personal expenses with business ones. Similarly, it is essential to keep the employee’s payroll segregated from contractor transactions. Accounts payables and receivables also need to be separated for real estate accounting.
When expenses are classified incorrectly, it leads to accounting errors. This can lead to additional hassles like preparing the wrong structure or building an incorrect valuation of the company. When classifying the expenses, accountants have to reconcile many bank accounts, credit cards and funds. As the size of the real estate companies increases, accountants struggle further with classifying the expenses.
– Lack of knowledge of accounting regulations:
Accounting regulations keep changing for almost all industries, more so for real estate. Real estate firms, with in-house accountants, often struggle to keep up with the changing regulations. They lack the resources and time needed to stay updated. Even with the most holistic accounting system in place, there is a constant need to stay updated. Accountants need to be constantly trained to stay abreast of the latest rules and regulations.
Ignoring or not taking note of them can lead to incorrect decision-making and even legal hassles. Hence, for real estate agencies, it is key to find professionals who are aware and make decisions based on their knowledge of the latest rules and regulations.
– Large-scale transactions:
There is no denying the fact that real estate industries are huge. The volume and value of each property are enormous and hence, especially, in the case of large real estate agencies, accountants might need to perform many closings every month. Dealing with such a high volume and value of data can get especially challenging, which can also increase the chances of errors.
Real estate accounting gets even more challenging when a client cancels a property deal at the last hour. Real estate agencies also face a significant amount of issues in managing financial data on a large scale. Complex real estate transactions, especially when there is an approaching deadline, can become a serious cause of worry for accounting firms.
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– Poor real estate accounting software:
Accounting in real estate is tricky in itself. But what is more challenging is the use of accounting software. Because of their complex nature, the industry requires software that is updated and can track almost all data, with least manual effort. Being an age-old, rigid industry, most accountants dealing in real estate accounting use outdated software.
The right accounting software offers seamless integration of data from different sources. It should offer high visibility into complex financial data. Cash flow tracking to reconciliation of transactions – it is important to use software that is new-age and meets all modern accounting needs.
Why is Outsourcing Best for Real Estate Accounting?
Managing real estate accounting can be a tedious, time-consuming, and risky task. By outsourcing your real estate accounting with an expert, you can save on labor costs, and get several tax benefits. Outsourcing also enables you to streamline operations, and enhance efficiency by using the expert knowledge and experience to your advantage. Getting well-versed in real estate accounting concepts needs time, training, and resources which small accounting firms often lack.
Outsourcing real estate accounting can be a strategic decision that provides scalability, allowing organizations to adjust according to fluctuating workloads and market dynamics. Want to understand how outsourcing can benefit your business? Write to us at connect@finsmartaccounting.com.
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Director Growth Strategy & Alliance
Maanoj Shah is a finance and outsourcing expert with strong Business Strategy and Scaling-up experience. Over the last 20 years, he has incubated multiple businesses and helped build global enterprises in verticals as diversified as hospitality, technology, and healthcare.
