Should you use a trust for real estate transactions??
Posted by Property Coach on Saturday, August 5, 2017
QUICKBOOKS FOR REAL ESTATE INVESTING
QUICKBOOKS FOR RENTAL PROPERTIES
In a prior post I covered using QuickBooks for property flipping. Using the software for flipping is a more straightforward use of QuickBooks and is somewhat easier to explain. Many software systems have been created to account for rental property, but if you are doing your own bookkeeping and you do not have a very large number of units, it is worth taking a look at QuickBooks and this system. If you are managing your own property the method I will outline here is a great way to track your buildings, tenants and rents without spending an exorbitant amount of money on an accounting software package.
This is a brief outline of how to use the software for rental property. I cannot go into extensive detail because it would certainly require much more than a blog post. If you do decide that this is the method for you after reading this post, there are manuals that have been written that will give you great detail on how to set the system up. The software is user friendly enough for non-accountants who are willing to put in a little bit of time and effort to learn. It will allow you to control your real estate investment portfolio and know at any given time where the business stands financially. There are a variety of useful reports that can be generated in addition to the standard financial reports such as a balance sheet and an income statement (P & L statement).
When setting up your system there is a section to track customers. For a rental system it is recommended that your buildings are identified as your “customers.” Within the customer base you can identify individual jobs. Your tenants become your jobs. So, your customers (buildings) can have within them multiple jobs (tenants). So, for example, let’s say you own two apartment buildings. Each building has three tenants. Your system would look like this:
Customer: 100 Main St. (This is building 1)
Jobs: Apt. 1 Smith
Apt. 2 Jones
Apt. 3 Williams
Customer: 200 Elm St. (This is building 2)
Jobs: Apt. 1 Rodney
Apt. 2 Dangerfield
Apt. 3 Quick
In my prior writing I discusses the significance of using the QuickBooks class system for flipping properties. Now I will let you know how it is useful in tracking rental properties.
One way of using the class system for rental properties is to set up each property as a class. There are other identifiers that can be used within the class system as well, but the basic setup for rental is to identify each building as a class. There should also be a class for items that may not necessarily be related to a specific building. Each expense and revenue item you record should be identified with the class that corresponds to the building the revenue or expense is attributable to. If it is a general expense that is not specific to a building then the class would be a “general” or “office” or some other identification that is to your liking. When you want to see how each individual building looks financially you would go to your reports and request the balance sheet and Income Statement (P & L) by class. You will be quite pleased to see that you have tracked the worthiness of each building and now know how each performs independently.
There are probably a few different reference manuals published that explain the system, but I found That “Property Management with QuickBooks” written by Don M. Lander and continued by his daughter, Lisa Edwards was a great reference for this system with great detail. More information can be obtained at: http://www.quickbooksforrentals.com/ or http://www.quickbooks-4-rentals.com/
QUICKBOOKS FOR FLIPS
Although accounting for your business may seem dull to most business people, it is an absolute necessity. I have found accounting interesting, but of course that is my background.
A versatile piece of software that can keep track of your investing activities is QuickBooks. I have used QuickBooks for all aspects of real estate investing that I have participated in, this includes flipping houses, accounting for rental properties and also hard money lending.
The way I use QuickBooks for flipping and hard money lending is more straight forward then the way to use it for rental properties. Using QuickBooks for large numbers of building can be cumbersome, but I have used it for some eight to ten buildings and at least thirty units without a problem. There are software packages specifically designed for tracking rental activities, but if you are an accountant you will recognize the fact that many are not your typical accounting programs, more are designed to keep track of rental properties, tenant activities and rental property owners if you are managing properties for multiple owners.
The way I set up QuickBooks for flipping houses is to put the purchase price and expenses of buying the house on the balance sheet as an asset. All expenses related to rehabbing the house, holding the house and selling the house are also on the balance sheet as sub-accounts.
I set the address up on the balance sheet and use sub-accounts for the purchase expenses, holding expenses, rehabbing expenses, and selling expenses. I find that breaking things down further through the use of the QuickBooks class system provides another way of further distinguishing expenses. For example, the rehab category might include classes such as electrical, plumbing etc. The holding category might include class items such as utilities, insurance, interest on any loans and so on. Using class categories rather than using another layer of sub-accounts helps to keep the balance sheet a bit cleaner.
Once the job is complete, and the house is sold, I take the revenue as income identifying that house address as an income account on the Income Statement (P & L) and I move all of the related asset items over to the Income Statement into a cost of goods sold account. This is a contra-account above the gross profit line under the related income account. In other words, the account appears directly under the revenue account so it gives me a gross profit on that project. From the total of all of the gross profits I deduct any other general expenses I have, such as office expenses, telephone, transportation etc. to come up with the net income. If you have used QuickBooks I hope with some close reading you can follow how I handle accounting for flips. If you haven’t used QuickBooks you may want to check its usefulness. In my opinion you do not have to be an accountant to use the software. I will discuss using QuickBooks for rental properties in the next blog.
There are a number of ways to get started in real estate investing which I can cover. Among them are flipping houses, wholesaling houses, investing in tax sales and tax liens, loaning money to individuals who rehab or to rental property investors, buying and holding property for rent, buying and holding property for lease-option, buying and holding while extending a short-term private mortgage (while helping your buyer fix less than stellar credit so they can eventually refinance with a conventional mortgage). I am sure I am leaving some things out, and you may not know what each possibility that I have listed means, but I will get into covering these options for investing in future blogs.
When I say first things first, I do not only mean deciding on what type of real estate investing you want to initially pursue, but what structure your business will take and how you will account for the activity of the business. You should always be aware that you must protect yourself legally as much as possible. That usually means setting up an LLC (Legally Liable Company) or a corporation or even one or more trusts. I have established many LLC’s for myself as well as for others without any problem because of my background as a CPA and my experience. You may feel more comfortable hiring someone to care of this paperwork. In Connecticut, the LLC is registered with the Secretary of the State for a fee of $120.00. The LLC is established by submitting to that office a document that is known as Articles of Organization. The Articles of Organization identify the name of the business, purpose of the business, business location, identifies one or more members or managers and also the individual being appointed for the purpose of receiving any legal notices. Soon after you receive the notice that the Articles of Organization document has been received and accepted, you must obtain a Federal Employer Identification Number through the Internal Revenue Service. In some states, such as Connecticut, you must obtain a state tax number as well. The governmental cost of establishing an LLC will vary from state to state. For example, Connecticut currently charges a filing fee of $120 while Massachusetts charges a filing fee of $500.
A trust is a different kind of structure. Establishing a trust may take the work of an attorney who specializes in the area, but I would suggest doing some research through a real estate guru. Lou Brown, a real estate investor who has worked with trusts, is someone who can provide some insight (Street Smart website: https://streetsmartinvestor.com/). Doing a little research and having a discussion with a knowledgeable attorney will help you make your decision. I have personally never used a trust. I have used the LLC structure exclusively, and the bulk of my investments have been through a real estate IRA, so I have not necessarily needed to be concerned as much with a trust.
Business can be conducted initially under an LLC structure then the property can be moved into a trust. In addition, an LLC can elect to be taxed as what is known as a Subchapter S Corporation. Each individual must decide what is best for their situation. Sometimes you may think you need a crystal ball to make the decision on how to be taxed. It can be difficult to see into the future. I have also used a stock corporation structure, but that can be cumbersome, unnecessary and possibly not provide you with the best tax advantages.
So, if your idea is to start by flipping, buying and holding or even starting as a wholesaler or lender, I would strongly recommend conducting that business under an LLC rather than your own name or a stock corporation. However, as always, the choice is yours and depends on your particular situation and the number of people involved in your business venture. Often in situations where an investor is acquiring property to rent the acquisition is made through an LLC then, when a trust structure is the preference, the is property is moved into a trust.
In addition to being wise about the structure of the business, you must be wise about accounting for your activity. Don’t wait until you have been in business for six months or a year to decide to keep track of your business activity. Get set up for keeping track for your income and expenses at the beginning of your venture. Not only do you need financial information and data to determine where your business stands from a profitability perspective, but you will need the information to provide to partners, investors and your tax accountant. I have been very successful using QuickBooks for my real estate accounting, and have used it for more than 30 rental units without a problem. However, there is software available specifically designed for managing rental property that is probably more equipped then QuickBooks in handling large numbers of rental units or for managing rental units for a number of different individual owners or investors.
When you have decided what type of real estate investing you would like to do and have taken the steps identified here, you are ready to get out and start your real estate investing activities. Good luck and continue reading this blog for more pertinent information.