Building the Right Chart of Accounts

[Christopher Freeman]

Howdy, all!

I've been lurking on the forums for a few months, and finally came across a topic that didn't seem to turn up any search results: Building a chart of accounts for a rental business.

Let me back up and start with a quick introduction: I'm Chris. I co-own a property management/REI start-up based out of Keene, NH. My business partner Alex and I met through our day jobs where we do financial analysis for a major national corporation. Most of our work revolves around budgeting and variance analysis, however we also do a lot of capital and operational modeling that draws heavily on the company's financial reporting. The modeling side of things has really been the driving force behind some early successes we've experienced, and we want to make sure that we're able to leverage our financial results to refine the accuracy of our modeling as we grow and learn.

Given our professional backgrounds, we care A LOT about the quality of our expense reporting; however, we are not accountants, and we've been struggling to determine what level of granularity we need to capture through our chart of accounts. We want to ensure that our financial statements maintain analytical value, but we don't want to make the bookkeeping so tedious that it never gets done properly.

So, now the actual question(s): 

1. How have some of the more experienced folks on here structured their chart of accounts? 

2. What works well about your chosen structure, and what are some of its limitations? 

3. To what extent do you try to capture the "root cause" of your financial results at the account level? As an example, we have considered breaking down Repairs & Maintenance into sub-categories like "Interior Surfaces" or "Plumbing" and then further breaking those down into sub-sub-categories like "Wear and Tear" vs "Damage" vs "Outside Influence."

Thanks in advance for your advice!

Chris Freeman

Parabola, LLC

[Ben Day]

Hi @Christopher!

Congrats on your business! It sounds like you’re in for some fun!

The absolute best and most important rule for making a CoA is: keep it simple. Sure, you could have a million subaccounts under repairs for every little thing you replace. Just remember that you’re making your financial statements and your taxes more complicated by doing this.

A lot of the time investors want this super-granular data for their rehabs. I’m all about that! If anything I would make sure each capitalized improvement expendIture is correctly documented so that you can find this data if you need it. This will also make it easier to do any “advanced” tax stuff like cost segregation.

You need to know the costs per property, but a huge CoA can become burdensome. By keeping a papertrail and becoming good at determining ERC and ARV, you'll knock out most of this problem. Focus on general estimates vs. "big ticket" estimates to give you a good foundation on this kind of analysis, and make sure that you're doing the accounting correctly when it comes to recording expenses as repairs vs. capital improvements. If you've got everything documented, you'll be covered once tax season rolls around and you'll be able to break out those costs without overcomplicating your bookkeeping.

The absolute most I would do is keep a running ledger of your rehabs and tracking costs that way. Then you can compare your estimates against the actuals and satisfy your financial analysis without overworking your books. After that, any capital improvements get added to the asset subaccount and are easy to manage.

Hope this helps!