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Best Practices Investors Should Know

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If you are a flipper or want to be a flipper, you need to think about implementing a sustainable and scalable system to automate and grow your business. A successful flipping business consists of systematic processes that enable the rationalization of transaction flows. On the back end, an important system of flipping business is the accounting system.

Accounting for expenses is essential to the success of your business. Accurate reporting not only reduces your overall tax profit, but also proves to potential investors and lenders in the future that you are running your business professionally. You can adopt the accounting role, but it is difficult to track expenses, especially to record receipts from various expenses.

Developing a good accounting / expense tracking system is not as difficult as you might think. There are plenty of software programs and apps aimed at helping you keep things organized. Here are some tips on how to stay organized and what you need to show your accountants at the end of the year. But keep in mind that in the end, the “system” is supposed to help streamline your business. It should be very easy to run, delegated to a competent employee with minimal instructions, and run error-free. Keep that in mind when you develop any system for your business.

Development of a sustainable accounting system

The first question we want to ask when developing a flipper accounting system is how we want to track and record revenues and expenses.

To track revenues and expenses, you need to develop a simple and repeatable way to record receipts and invoices. This is a basic “shoebox” method (not recommended), just save the receipt in a shoebox or file folder and give it to your accountant at the end of the year. This method is a simple and repeatable system, although it costs a lot at the end of the year because it uses more accountant time.

A better way to track revenue and expenses is to use software programs and apps. The best app for expense tracking is Expensify. With this app, you can scan receipts, enter the amount, categorize it and save it in the cloud. This is a steroid shoebox method and is easy to maintain. You also need to use the mileage app (or notebook) to track your mileage at work. For 2015, a $ 0.575 deduction will be applied for every mile travel using standard methods.If you want to know more about travel expense deductions, please check out This article I wrote..

You can also consider using accounting software such as Quickbooks. I use Quickbooks Online on most clients, but they like it because they just link their bank and credit card accounts and write a short note on each receipt until they can establish a pattern. Once I establish a recognizable pattern, clients don’t even have to worry about their books unless they have questions about the transaction. Let’s talk about automation.

Related: The ultimate guide to adding systems and outsourcing to do less work in real estate

Regardless of how you use it or your software / app, you should use basic categories for transactions. These categories typically consist of:

  1. Acquisition cost
  2. Rehabilitation cost (improvement)
  3. Repair cost
  4. Owning cost
  5. Selling price
  6. Selling costs

The IRS treats the two costs in a very different way, so it lists both rehabilitation and repair costs. Normally, this breakout has nothing to do with flips. But what if the flip doesn’t sell? What if I need to borrow instead? This is when it becomes important to distinguish between these two categories.

The important thing is to keep it simple. Remember that you need a simple and reproducible system. It can be handed over to employees with minimal instructions and can be performed error-free. Don’t get too caught up in the expense category. If you have any questions about the transaction, please contact CPA.

What kind of supporting record do you need to keep?

Except in some cases, the law does not require certain types of records. You can choose the right records management system for your business that clearly shows your income and expenses. As mentioned above, the shoebox method is available. However, we recommend that you use a software program and use the app to streamline bookkeeping.

For supporting documents regarding the purchase and sale of real estate, all applicable HUD-1 statements and receipts related to the purchase or sale of real estate must be retained. You will also need to keep a real estate tax assessment card (from the county) and, if applicable, appraisal and insurance documents.

Supplementary documentation is also required for costs incurred as part of rehabilitation or maintenance costs. The supplementary documents should indicate the amount paid and that the amount was the operating cost. The expense documents are as follows:

  • Canceled check
  • Cash register tape
  • Account statement
  • Credit card sales slip
  • Invoice
  • Check cash vouchers for small cash payments

You may also need to issue a return of information. These returns consist of Form 1099-MISC and Form W-2.

Return of information

If you make or receive payments in your business, you may have to report them to the IRS regarding the return of information. The IRS verifies that you are actually reporting your income by comparing the payments shown in the return of information to those reported in the return of the person who received the income. Be sure to understand the next section, as if you do not submit a return of information, you will not be able to submit a penalty and it can be very expensive.

To report certain payments made in a trade or business, you must submit Form 1099-MISC and other income. Directly from Publication 583, these payments include:

  • Pay $ 600 or more for services performed by non-employees such as subcontractors, lawyers, accountants, and directors for your business
  • Payment of rent over $ 600 other than rent paid to realtors
  • $ 600+ prizes and prizes that do not cover services such as prizes on TV and radio shows
  • Loyalty payments over $ 10
  • Payment to a specific crew by the operator of the fishing vessel

Submit Form W-2, Wage and Tax Statements to report payments such as wages, tips and other compensation, withholding income, social security, and Medicare taxes to employees. If you have W-2 employees, it is highly recommended that you take advantage of a software program with integrated payroll services to make your books smoother.

Cash-to-accrual accounting method

When you run a business, you need to decide which accounting method you will use for your business: cash or accrual method.

Most taxpayers use the cash method to account for their personal income. The cash method basically recognizes revenue when a check is received and costs when paying.So on December 31stst2015, If the tenant pays 12 months’ rent in 2016, all income will be recognized in 2015 based on cash accounting.

Related: How to use internal controls to mitigate risk and prevent loss of profits

Accrual accounting recognizes revenue and expenses when they are earned or incurred, not when you receive or pay a check.Continuing the above example, if the tenant pays 12 months’ rent on December 31stst, All 2015 income will be applied in 2016 and will not be recognized. Insurance is another great example. Even if you pay a prepayment lump sum, you will still incur actual costs, so you will be aware of your bookkeeping costs each month. .. Specifically, prepayment is made in an account called “prepayment insurance” and the “insurance cost” is reduced every month. This is an accrual accounting method.

Have you lost you yet? Let’s see how this applies to flippers.

If you plan (or have already done) to flip through multiple properties, the IRS will probably classify you as a dealer. For accounting purposes, this means that your home is classified as inventories, and the IRS requires you to use accrual accounting methods. For this reason, we recommend that you use accrual accounting from the beginning. This way, you don’t have to pay an accountant an expensive fee to move your book to accrual accounting later.

overview

We hope that this information will help you develop a good accounting system. If you’re just getting started, try to keep it simple. As you grow, find the software program that best suits your needs to streamline your accounting and records management capabilities. After all, you want to enter the market to close transactions, rather than spending time performing back office accounting functions.

Disclaimer: This article does not constitute legal advice. As always, consult a certified accountant or accountant before implementing your tax strategy to ensure that these methods are suitable for your particular situation.

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