EXPLAINED: bookkeepers v CPAs - hire one of each or combo?

Question

Should you hire a bookkeeper and a CPA separately or look for a one-stop provider?

Neither approach is inherently better than the other. Both have pros and cons. Some considerations:

- The least expensive route is to have a bookkeeper and a tax person separately, since bookkeeping is generally cheaper. A CPA's charges for bookkeeping would normally be at their regular rate.

- Also, a solo practitioner who does both taxes and bookkeeping has no way to balance their load throughout the year. As a result, almost inevitably, expect delays, poor responsiveness and cut corners.

- On the other hand, any real estate CPA will tell you that the quality of the work we see from outside bookkeepers is godawful. Then we have to tell our clients to go back to their bookkeepers and get things fixed/redone, and that ticks off everyone involved. And it costs more. And it tends to push things towards the last-minute mad rush to the IRS deadline, cutting more corners and creating more stress for everyone.

- This disconnect problem is especially harsh in real estate. Bookkeeping for real estate is extremely complicated. Regular bookkeepers have no clue. They know how to do bookkeeping for Realtors, which is very straightforward, and they foolishly assume that real estate investors are similar. Absolutely not. It's crazy complex, and unless your bookkeeper understands how real estate taxation works, there is NO WAY your books will be ready for tax preparation. Your bookkeeping money will probably be wasted.

- Same is true for pretty much all of those remote bookkeeping companies that market themselves as economical and efficient alternative. For Realtors or wholesalers - yes, it could work. For investors - a pipe dream. Even worse than working with an individual bookkeepers, these outfits will insist that they have their "systems" well-oiled and will refuse any adjustments. Of course, because it hampers their "efficiency." Which is worthless to you because their results end up useless for tax preparation.

- Bookkeepers who know real estate normally specialize in this niche and work with investors exclusively. These competent real estate bookkeepers are EXTREMELY difficult to find. In fact, much harder than finding us, good real estate tax accountants. Those few competent real estate bookkeepers who are out there are in a very high demand, meaning that they are very busy. And not cheap.

- If you're going with a multiple staff company as opposed to a one-person shop, and they provide both bookkeeping and taxes - you eliminate the disconnect problem. What you do not eliminate is the competence issue. It has to be a firm specializing in real estate, otherwise you will only get both sides botched: bookkeeping and taxes.

- And you will introduce another problem: losing flexibility in hiring help. With two separate providers, if your bookkeeper is good but your tax person is not, you keep the former and upgrade the latter. If it's the same firm, you're stuck. You either have to tolerate their underperformance  (or poor service or unreasonable pricing) on one of their two services for the sake of keeping the other - or you have to dump the entire firm and start from square one.

- Yet another problem: turnover. If your CPA firm offers bookkeeping, and their in-house bookkeeper leaves, they will be scrambling to plug the hole. Often it results in a rushed and undertrained replacement. And you have no control over that, because you're not hiring, they are.

- Finally, often you can find a real good real estate tax person who does not provide bookkeeping and, less common, a real good real estate bookkeeper who does not do taxes. For example, my tax firm does not offer bookkeeping. Are you willing to dismiss such opportunities while waiting to find a one-stop provider?

See, I gave you no recommendations. Only food for thought. The decision is your personal choice.

Closing tip: if you hire two separate providers, absolutely make sure upfront that their approaches are compatible. You don't want to bring your expensive books to your CPA on his cutoff deadline only to hear that he cannot work with this mess, and the books must be redone. If I had a nickel for every time I said this, I'd be retired by now.

John Malone · Answer

@Michael Plaks so agree on the last piece. If the providers are on a different cadence it can be a nightmare and this should be discussed ahead of time

Account Closed · Answer

Hey David. I love this answer. I was an engineer before I owned by firm and this made me chuckle

David C. · Answer

@Michael Plaks

So far this thread has only had input from CPA's and attorneys.

I used to write software for airplanes.  I know if you get 10 pilots in a room and ask them how best to set up workflow (displays, data entry, etc), you get 10 different answers.  If I as a bookkeeper ask 10 different CPA’s how to do real estate bookkeeping “the right way”, will I get 10 different answers?

I’ve read and absorbed a book on RE bookkeeping written by John Hyre, CPA and attorney.  If I do it that way, is that enough?  Or am I going to have endless battles with CPA’s as I expand my bookkeeping practice?

I do my own taxes and bookkeeping for my own RE deals, and I’ve had no battles with my tax preparer (me), and no IRS issues ... so far.  Also done bookkeeping for 2 partnerships I was in, and the CPA we used only had a few minor questions with no corrections needed.

Markus Shobe · Answer

I agree there are positives and negatives to both approaches.

Bernard Reisz · Answer

@Michael Plaks Didn't either get any nickels for saying this, but it's still the reason I retired (from real estate CPA services)!

Gita Faust · Answer

Instead of a bookkeeper, I would look for an accounting advisor who also offers bookkeeping services. Add one-second goal to the list to track your day-to-day operations, which will let you know your equity in the property and have your financials ready for partners, shareholders, and lenders.

Nate Meeker · Answer

Great post. One of the easiest ways I’ve found to keep track of books for small time investors is by creating a separate bank account for each rental. Run every transaction through that account and at the end of the year you can export everything to an Excel document where you can further categorize, sort, and sum totals.

Simon W. · Answer

I think it is just crucial to have both teammates know real estate and not just the general knowledge.

I typically work with my clients' CPAs. It helps that I review their work and vice-versa.

EXPLAINED: bookkeepers v CPAs - hire one of each or combo?

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