Ask a Real Estate CPA: How Can I Grow my Residential Real Estate Agency?
We get this one a lot. Real estate agents are always looking for every possible way to get ahead, especially given current market conditions. Popular answers to this question often involve marketing tools and sales processes, but the reality is that growth easily comes undone without proper accounting practices.
As a real estate agent’s business grows, new challenges require more robust accounting solutions. There are no one-size-fits-all solutions as everything depends on the size & structure of the business, and its financial goals. There are, however, best practices that can help any real estate agency grow. Here are six easily overlooked accounting practices that can help real estate agents grow their business efficiently, no matter their current size:
Real Estate Accounting Best Practice #1: Track Time and Expenses
It seems obvious, right? But when you're busy walking properties and closing deals, accurately logging time and expenses are the last things on an agent’s mind. That’s a shame too because being “too busy” typically results in missed deductions, lost billable hours, and even penalties.
Let's say an agent spends three hours attending a local housing seminar and chooses to stay and network afterwards instead off logging their time. That’s three hours that could classify as a business expense deduction missed. Same goes for expenses; mileage, meals, and office supplies are all deductible expenses that can, and often do, go unrecorded.
And discipline isn’t always the answer here. Time tracking and expense management software can be a big help by allowing busy real estate agents to log hours and expenses in the moment and on-the-go.
Real Estate Accounting Best Practice #2: Invest in Cloud Accounting Software
“I’m not at my desk” is no longer an acceptable excuse for missed payments, late invoices, and forgotten deadlines. Cloud accounting software like QuickBooks Online (QBO) makes financial information easily accessible. Some cloud-based tools even offer features like automated invoicing, expense tracking, and financial reporting, saving time and helping agents make better financial decisions.
An easy use case is setting up automatic payment reminders for clients and scheduling recurring, on-time bill payments that keep the business running smoothly and eliminate costly late fees. Simply by reducing excess fees, cloud-based tools can also improve cash flow management.
Real Estate Accounting Best Practice #3: Hire a Bookkeeper
This is a big one. More growth means more transactions & more accounting tasks to manage with less time to do so. Hiring a bookkeeper to handle tasks like invoicing, bill payments, and financial reporting gives producing agents more of their most precious resource: time. More time for producers usually results in stronger relationships and more closings. Additionally, a bookkeeper can provide valuable insights into financial data and help managing agents make better strategic decisions.
For those agents who are reticent to pay for “menial” tasks execution, conduct a simple hourly comparison between an agent’s average hourly rate vs. a bookkeeper’s hourly rate. The time-cost saving should make this a simple business decision.
Real Estate Accounting Best Practice #4: Use a Chart of Accounts
A chart of accounts is a list of all the accounts and categories used to track a business's financial transactions. Basically, it’s a map of how to keep finances organized that can provide financial clarity and lead to effective decision making.
Let’s say an agent creates a chart of accounts separating rental income, commissions, and office expenses. Now the agent can track the profitability of each area of the business and easily identify opportunities to cut costs or increase revenue.
Using a chart of accounts also makes it easier to prepare annual taxes. Agents can quickly generate a profit and loss statement and other required financial reports, reducing a CPA’s billable hours and reducing the agency’s expenses.
Real Estate Accounting Best Practice #5: Monitor Key Financial Ratios
Certain ratios are critical to understanding the financial health of an agent’s real estate business. Current ratio, debt-to-equity ratio, gross profit margin, and net profit margin are all warning lights indicating which areas of the business require extra attention before they become problems or worse, financial liabilities.
Closely watching key financial ratios also helps agents choose the right action plan. For example, a high debt-to-equity ratio often indicates too much reliance on debt financing. In this case, an agent needs to look for ways to reduce debt or increase equity. A low gross profit margin signals the need for more closings or reduced operating costs.
Real Estate Accounting Best Practice #6: Seek professional advice
Seeking professional advice can be invaluable when scaling your real estate. CFO advisors and real estate CPAs provide expert guidance on tax planning, cash flow management, and financial reporting, all tailored to an agent’s exact situation and business goals. They also help agents navigate complex financial situations and carefully weigh the implications of their financial decisions.
Think of CFO and CPA advisors less as growth coaches. They help identify new opportunities, provide optimization insights for existing business processes, and help avoid costly mistakes by ensuring compliance with local laws and regulations.
Scaling a real estate business requires careful planning, execution, and financial management. Spending time on the 6 accounting best practices for real estate agents discussed in this article can help optimize financial performance and position an agent’s business for sustainable growth. Remember to stay organized, leverage technology, monitor your financial ratios, and seek professional advice. With the right approach, finances can become a growth tool instead of a hindrance, giving your real estate business the competitive edge you’re looking for.
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