Gaining proper insight into the financial performance of your commercial real estate investments is absolutely essential in order to maximize returns. Effective accounting and reporting can provide invaluable data to help you make smart investment decisions.
From understanding different types of financial reports, to analyzing key metrics for success measurement, strategic accounting and reporting is going to help you with your commercial property management.
Number crunching is not necessarily your favorite part of commercial real estate investing, but you need to have some kind of system in place to understand what you’re earning, what you’re spending, and where you might need to make some changes.
You may not realize it, but the way you manage your accounting and financial reporting can impact what you earn. To maximize earnings, an investor needs to understand their return on investment (ROI), which, at a minimum, includes:
Rental income
Appreciation
Capital gains
Maintenance and repair expenses
Taxes and insurance
Variable expenses
Tracking these details keeps investments profitable.
Bell Properties always tells investors that good accounting software is essential. As professional real estate asset managers, we want to share some tips on how to benefit from good rental property accounting.
Here are some tips at setting up your effective commercial real estate accounting systems.
Investment Property Banking
Most investors understand the importance of keeping business and personal accounts completely separate. Some commercial property investors establish an LLC, and in that case, separate funds are a legal requirement. This is a great way to protect yourself; when the LLC buys real estate instead of you, there’s less risk to you, personally.
Even outside of an LLC, it’s just good business to keep personal and real estate income and expenses separate. You can easily make a mistake if they’re commingling, and it will cost a lot to untangle those errors.
As you set up your business banking, consider how many properties you own now and how many more you plan to buy. Some investors set up different accounts for each investment property. This is a good way to stay organized, especially for those owners who are renting out 10 buildings or more. It’s not expensive to open and maintain a bank account, and as long as all of them are linked to the larger accounting software system being used for rental property accounting, it’s a good way to stay organized.
Commercial Los Angeles Investment Properties and Record-Keeping
Organization is a big part of profitability, regardless of the size of your investment portfolio. Taking advantage of tax deductions and write-offs is one of the major benefits to investing in real estate. It contributes to ROI. However, these benefits cannot be claimed without property documentation to back up the deductions. Keep good records that are accurate, detailed, and transparent.
There are a few good ways to manage your documentation and contribute to sound record-keeping when we’re talking about your commercial real estate:
Collect receipts into a digital file. When you work with a professional Los Angeles property management company, you’ll likely have access to excellent technology, which should include an innovative accounting system. Otherwise, there are apps available and even software platforms designed to support individual, private investors. The important features to look for include the ability to access records when they’re needed.
Document all the rent that’s collected. Most commercial tenants will prefer wire transfers or other sorts of online rental payments, and those are also easier to track and sort.
Document what is spent as well. Every bill that’s paid should go into the system and be tracked in a digital file.
This type of documentation and electronic tracking will assist with ROI because it helps investors understand their metrics. A good accounting system will provide benchmarks that demonstrate the strengths and weaknesses in a particular property or the portfolio as a whole.
Leveraging Your Profit and Loss Reports
You’ll know how much you’re earning when you have reliable profit and loss reports available for your commercial properties. After accounts are established and a system has been put into place to gather and track all the necessary documentation, generating reports will be a great way to increase ROI and understand where each property stands in terms of profitability.
Accounting reports and statements can serve as an easy guide in understanding how much is being earned and spent. It helps investors identify properties that aren’t performing as well as they should and it also helps to create new benchmarks and goals. Some investors like to run a monthly report and others are fine with a quarterly look at where things stand. You might want to look at your portfolio as a whole and at each building individually.
Typically, all profits and losses reports will provide a snapshot of operating earnings, which is the money that’s earned on an investment before rental income and tax. This isn’t net income, which is the sum of what’s earned after taxes and expenses. With data that’s gathered from these numbers, investors can get creative and make digital displays and graphs that make it easier to understand where things are going well and where improvements are needed.
Fiscal trends will quickly show up, and it will become easy to see which properties are losing the most on maintenance or turnover. This will help with future budgeting and forecasting.
Technology Investments for Commercial Property Owners in Los Angeles
Reputable accounting software can help with banking, bookkeeping, documentation, and reporting. There are plenty of software options out there, even for individual commercial investors who may only be renting out one or two buildings or spaces.
The best programs and platforms are accessible, user-friendly, and transparent. Anytime there’s an audit, a court action, or even a complaint or dispute from an HOA or a resident or a lender, having the documentation easily available will help.
There are so many tools out there that can help you be better at rental property accounting. Some are designed specifically for real estate accounting, some are not. Ask any Los Angeles property management company for the latest list of commercial property accounting platforms that can be most helpful to you. You’ll want to improve your tracking and automation on the financial side of your business.
There are plenty of major and easily recognizable platforms and apps such as Buildium and Appfolio. These are often very good. But, if you’re a smaller investor looking for something less intensive, you can find smaller start-ups and apps that seem to be showing up all the time. Often, they’re worth exploring especially for investors who don’t have access to a large technology budget or a platform that comes with professional management services.
Los Angeles property management companies can help with the technology and the accounting. Choosing to work with an asset management firm that meets every need from the beginning to the end of the investment process is especially beneficial to investors and their ROI. At Bell Properties Commercial Real Estate, we have customized plans in place for each investor who chooses to partner with us. The accounting is taken care of, as is the reporting and the documentation. There’s no need for our investors to buy any software or download any new apps. We take care of all that ourselves, providing the required information and reports when necessary.
This is a huge benefit to the owners and investors we work with.
Hot Tip: Audit Your Commercial Property Management Accounting Routinely
Now that we’ve provided some great background information and easy advice, let’s go back to where your starting point should be: an audit of your accounting practices. Not only should you use this audit as a starting point, you should make it a recurring event. An annual audit of your accounting and financial reporting practices can keep you transparent, informed, and educated.
Take a look at your books and how you keep them:
How often are you reviewing what you earn and spend?
Are you measuring these numbers against your budget?
What’s your system?
As you’re evaluating how you manage the documentation and tracking of these details, think about whether those practices are earning you more or costing you more.
With the right accounting tools and software, investors will see themselves increase what they earn and decrease what they spend. We’re surprised when a commercial real estate investor in Los Angeles cannot say with certainty what their assets are worth and how they plan to maximize their value. That’s going to be costly. Improved accounting practices can increase ROI and reduce the risk of unexpected losses.
Don’t be afraid to seek help from local property management professionals. Bell Properties California can offer advice and will also make some referrals to accounting professionals and CPAs, if that will help.
A comprehensive real estate investing partner who has experience with every facet of the process is always the best and safest bet. When you’re choosing a Los Angeles commercial property management partner, consider what they bring to the table when it comes to accounting and financial reporting.
We’d love to tell you more about our systems. Please contact us at Bell Properties Commercial Real Estate.
