Shoe Box Method
By far this is the most unreliable method. This relies on the ability of the person to collect each and every receipt and save it in some form or fashion. For the more organized it might be sorting receipts into file folders based on house or transaction or store.
However, at the end of the year, someone has to go through and sort out all the receipts to determine data for tax purposes. To hand this task over to a bookkeeper could cost $25 to $35 an hour or more. Turn it over to our CPA and look for a really large bill.
Plus what if you lost a receipt, or it faded?
Or what if you need a snapshot of how a particular transaction is doing right now, today? Totally impossible without several hours or days sorting information.
So not the best method out there, although there are some great phone apps that could be utilized to take a photo of a receipt, categorize it, and help make more sense than the old-fashioned shoe box method – we might now call it the phone app method.
Excel Spreadsheet Method
This one is for the number cruncher’s and it can make sense, but this involves setting up a spreadsheet for your bank and credit card accounts, a spreadsheet for each house and a spreadsheet for each tenant if you are a landlord. When you have an expense, you have to enter it into the checking or credit card spreadsheet AND enter it into the property spreadsheet. They call this, good old-fashioned double-entry bookkeeping and it’s the way bookkeeping has been managed since, well bookkeeping was invented.
If you have a rent check come in, it needs to go into the spreadsheet or ledger for the bank account, the house involved and now also for the tenant involved, that’s triple entry bookkeeping. And if you send all these spreadsheets to your CPA at the end of the year, I am sure there will be a hefty bill involved. And again, how can you come up, quickly with meaningful reports on how a property or tenant is doing. Plus do you want to have to make the same entry two and three times and then spend hours studying the charts to figure out how your business is tracking?
Now there are a lot of software out there, but it is my understanding that only one is easy for the average person to use and that is QuickBooks. The CPA will probably still take the reports that QuickBooks spits out and enter them into their own software system, but they can do this in a fraction of the time in comparison to the first two methods. And because QuickBooks is simple and easy to use – not much harder than sending an email, you might actually take a few minutes a week to enter everything.
This is the method our business selected when we were wee real estate investors. We spend a few hours with our CPA setting up accounts then it was a matter of a few minutes a week to about an hour a week now with more deals. We enter something once and QuickBooks puts it in all the right places. Plus if we need a snapshot of a particular deal, loan, tenant or our overall business today, compared to last month, last year or the last 5 years, it can do that for us with a few clicks of the mouse.
Here are some for instances:
We buy a light fixture from Home Depot.
- We will open up Quick Books
- Open up a Check (or credit card)
- Enter who we wrote it to – Home Depot
- Enter the Amount
- Put in a memo if we want one
- Enter in an expense account – rehab materials, repair materials or whatever
- Enter in a house
- Quick Books does all the double entry stuff for me.
Or on a Rental, we receive a check from a tenant
- We open up QuickBooks
- We open up a receive a payment from a customer feature
- Enter in a Customer’s Name (this is the tenant)
- Enter in the Amount
- Apply it to an outstanding, automatically entered rent invoice
- The invoice will apply it to the correct month’s rent, the correct house, and correct tenant accounts.
- We can do this for all tenants
- Then we open up the deposit feature and deposit all the rent checks into the right account.
Now I can pull up a report with the click of the button so I know things like:
- How late the tenant is on rent and how often they have been late
- How much in repairs I have made this year compared to last year on a house
- How much a rehab on a particular house cost me
- How much I owe on a credit card or a loan.
So, in my opinion, if you are not quite on the QuickBooks method or if you are quite lost in using QuickBooks, take the time to learn how it works and how to use it in your own business. Classes will give you a good general overview on how to set things up and how to make entries. I would then take it a step further and talk over your account set up with your CPA as there are a few different ways to arrive at the end destination and starting with the right roadmap that your CPA is using will help.
Note that there is a QuickBooks for every business. Most investors are going to use QuickBooks Pro and it will further have custom settings. The folks at QuickBooks saw this post somehow and asked us to direct you to their Online Version – so click here to visit the QuickBooks website. The think an online version is great if you have just one company to manage. But as most investors have several companies and possibly several Self-Directed Retirement Accounts to track, each with their own set of Quickbooks, going online can get quite expensive, so a desktop version is going to be way more cost effective.
Be sure to check out the QuickBooks training that MAREI is offering on October 21st It is being taught by Tax Attorney John Hyre. He shows the basic setup of accounts for Real Estate Investors and how to make basic entries. Click to get the details here!