After you have acquired your commercial property, managing your finances becomes one of the most critical aspects of property ownership. Even if you only have a five suite building, you are still the owner of a business and you must run your finances accordingly.
Remember keeping good, organized books isn’t just to keep you out of trouble with the IRS; it is also to keep you out of trouble financially. Without good records you will not find inefficiencies with your properties and therefore will not be able to maximize cash flow and value.
As an example, if you have one tenant paying $400 per month that you did not notice was past due for 60 days, you have not just lost the $800 but you also will now lose another $400-800 during the eviction process, the $800 that you would have gotten from a new tenant, plus the cost of eviction is around $300-$500 per occurrence. So, one delinquent tenant can cost you thousands of dollars if you are not managing your finances.
It is also important to keep good records for when you want to sell your property. If you have accurate records you can normally generate a higher price since the new buyers feel more comfortable with the books and knowing exactly what they purchased.
Documenting the Income Received
With today’s technology in banking there are many ways that you can make available to your tenants for them to pay their rent. They can use conventional means of a check or money order but you may decide it is easier to accept credit cards, electronic funds transfers, or on-line banking. These methods give you more immediate access to funds which helps you know quicker which tenants are past due and which tenants are current.
You want to make sure you always keep your rental properties separate from your personal records. It is also helpful to separate income by each property if you own multiple properties or if you are running a management company, then make sure you have accurate percentages with which to allocate the income and expenses to each property.
Documenting the Expenses Paid
It is beneficial to hire a good real estate tax advisor even if you do not own a large commercial property. The reason for this is that the real estate tax laws are various, complex and numerous. There are certain expenses that can be expensed immediately and other expenses that need to be capitalized and expensed over a longer period of time.
By owning commercial real estate you not only get to expense operating expenses such as payroll, management fees, repairs and maintenance, etc but you also have the ability to expense non-cash expenses such as depreciation and amortization. Depreciation reduces your current income but is recaptured at some point in the future. A good real estate tax advisor who is familiar with such items as cost segregations and 1031 exchanges will help minimize your expenses.
Documenting Security Deposits
A lot of novice property owners consider security deposits as income and therefore record it incorrectly on their financial statements. Security deposits are considered a future liability that is owed back to the tenant if they comply with all the terms of the lease agreement. If the tenant does not comply with the terms of the agreement then the security deposit may become income later, however this is normally not determined until the point where the tenant vacates or moves out.
Using Budgets and Managing your Cash flow
Just as in your personal life, it is important for you to use a budget on your commercial property as well. Budgets allow you to monitor the income and expenses on the property to make sure that you are operating in a positive cash flow situation or at least making the necessary steps to operate in a positive cash flow situation.
Budgets also give you an idea of how much money you need to set aside in order to cover any large expenditure such as repairs or rehab costs. Budgets will show you how long you will need to save up in order to be able to pay for this expenditure out of cash flow or how much you will need to finance in order to pay for this expenditure now.
Budgets are also helpful in comparing historical income and expenses to current income and expenses. If you have historically been paying $12,000 per year for insurance and now your premiums have jumped to $16,000; it is most likely time to shop your insurance with another provider.
Likewise, if your physical occupancy has remained the same but your income has decreased, you may have a property manager that is skimming off the top, the market may have dictated that you decrease your rental rate or you may have a high delinquency rate and need to do a better job screening potential tenants. Again, this is all information that your budget will help you analyze.
Recording your Accounting Manually vs. Using an Accounting Package
With today’s technology and the economical accounting packages that are available for small business owners, I would highly recommend that you use a computerized accounting system. A manual system not only makes it difficult to share information with other parties (your banker, accountant, broker) but it also can become a huge waste of time if there is ever a posting error and you have to re-calculate the numbers. Quicken, Peachtree and QuickBooks all work with spreadsheet programs such as Excel which will help make analysis and property tracking a lot simpler.
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