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Real Estate Accounting: Key Practices and Performance Metrics

The real estate sector in Washington State has witnessed massive growth in the past few decades, which makes it a very attractive and promising industry for investors. Businesses are enjoying significant growth in revenues, which has led to a rise in the demand for real estate accounting solutions. 

While you can hire a real estate accounting firm in Seattle, Washington, and get access to professional real estate accounting solutions, understanding how real estate accounting works can enable you to make more informed decisions, effectively manage your investments, and maximize your financial returns

Understanding how to perform real estate accounting

Accurate accounting records are pivotal to the financial stability and success of a real estate business. Whether you are a small-time real estate agent or a big-time real estate investor, becoming knowledgeable about real estate accounting can help you monitor and manage your finances more effectively.

  • Real estate accounting begins with selecting an accounting method between the cash method and the accrual method. The cash method records only transactions where the money actually changes hands. The accrual method, on the other hand, records every transaction as it occurs, regardless of money changing hands.
  • Next, you must divide your income into different accounts that you can debit or credit as the money comes and goes. Creating and maintaining a complete chart of the accounts can help you record transactions more conveniently.
  • Always keep your business contributions separate from your personal funds, as it will help you avoid confusion and ensure accurate accounting.
  • Create a well-organized system for filing all your financial records and documents. This will allow you to quickly access the desired data whenever needed. You must also create structured backups on hard drives.
  • You must also reconcile all your financial records periodically to ensure and maintain accuracy. It will also allow you to fix disagreements, if any, with the banks and clients in a timely manner.
  • You must include the latest software and tools to make accounting more swift, efficient, and accurate. 

Things to consider

Apart from the above, considering the following things will also make real estate accounting very convenient and accurate.

  • Make sure that you have sorted the categories for income and expenses, like rent, repairs, tax, debt, mortgage, sales, etc.
  • Record your day-to-day expenses related to real estate, and you’ll be able to manage your finances much better.
  • Remember that the property loses its value due to wear and tear, also known as depreciation. Calculating depreciation will help you save on taxes you pay on the property.
  • While you record every transaction, it is also important to balance your books periodically to ensure that no income or expense is missing or recorded erratically.
  • Take taxes into consideration and follow the rules while preparing and filing taxes like income tax, property tax, etc.

Key performance indicators to track

Tracking various key performance indicators will allow you to understand the different areas of your business that may require reviewing. They will also help you be on top of revenues, return on investments, and much more.

For real estate agents

If you are a real estate agent, the following could be the main KPIs that you must monitor.

  • Volume of sales: Your revenue and sales volume would play a crucial role in reflecting your financial performance. Ensure that activities like property sales, renting, investing, leasing, etc., are bringing in the desired revenue.
  • Appointment to listing conversion: Appointment to listing conversion rate is the percentage of appointments with sellers that convert into final listing.
  • Per sale commission: The commission a real estate agent earns per sale indicates the performance of a real estate agent. More sales means a sizable amount of money for the agent.
  • Appointment bookings: The higher the number of appointments a real estate agent secures, the higher their chances of making a sale.
  • Time on the market: Time on the market refers to the average number of days a property takes to sell. The quicker the property sells, the better the agent’s performance.

For real estate investors

Following are the KPIs to track for a real estate investor.

  • Number of properties: The number of properties a real estate investor acquires indicates their performance. You should also consider factors like acquisition cost, date of acquisition, return on investment, etc., to assess the performance.
  • Acquisition cost: The cost of acquisition includes purchase price, commission, administration cost, insurance, etc. 
  • Return on investment (ROI): The ROI indicates the profitability of investments; the higher the ROI, the better the performance.
  • Time to close: The time it takes to acquire a property and the time it takes to complete the sales are also key performance indicators. The shorter the window, the better the performance.
  • Operating expenses: Higher operating expenses mean it is costlier to manage and run the business. Therefore, the lesser the operating expense ratio, the better the performance.

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