Show Me the Money: How To Stop Flying Blind and Master The Art Of Tracking Income and Expenses In Your Real Estate Business
We’ve all heard the statistics about the large number of businesses that fail in the US every year. Another troubling stat is that of the large number of the businesses that fail, a significant portion of those do so because of cash flow problems or because they simply run out of money to continue operating.
If you don’t want your real estate investing business to be counted in the number that goes under this year, it’s crucially important that you have a keen understanding of the “health” of your business at all times. One way to do this is by carefully keeping track of all the income and expenses related to your business.
You might be tempted to think you can keep track of everything in your head or just use the transaction listing from your bank account to see everything that’s happening financially in your business. Don’t be fooled! Relying on either of these methods can backfire quickly and leave you in the dark when it comes to truly knowing how your business is performing from a financial point of view.
Luckily, keeping track of income and expenses has become easier than ever with the tools we real estate investors have access to today. With a variety of apps and websites available to us, we have a variety of income and expense tracking options right at our fingertips.
One tried and true method for keeping track of financial information is the old reliable spreadsheet. And for all of you who are saying to yourself, “I don’t know the first thing about spreadsheets!”, don’t worry, we’ll give you a template you can download and use for free today.
First, let’s be sure we all understand WHY tracking your income and expenses is so important for your real estate business. Here are just a few of the reasons why:
- Accurate financial reporting: By tracking your income and expenses, you'll be able to generate accurate financial reports that show you how your properties are performing. Many lenders now require you to submit financial statements to see how your business is performing as part of the underwriting process for a loan.
- Tax compliance: Keeping good records of your income and expenses will make it much easier to file your taxes accurately. This can save you time, money, and stress when it’s time to file your taxes.
- Maximize deductions: Many rental property expenses are tax-deductible. By tracking your expenses carefully, you can make sure you're claiming all of the deductions you're entitled to, which can help you reduce your tax liability. You won’t forget any expenses you can use for tax deductions, if everything is written down.
- Identify areas for improvement: By tracking your income and expenses, you can identify areas where you can improve your profitability. For example, you may be able to find ways to reduce your expenses, such as by negotiating lower insurance rates or finding a landscaper who does great work at a lower price. With the numbers right in front of you, you’ll have the information you need to make these important decisions.
- Make better investment decisions: Having a clear understanding of your property's financial performance will help you make better investment decisions. For example, you may be able to identify properties that are under performing and need to have rent increased or be sold. You’ll also see which properties are candidates for further investment. This information is essential when managing your portfolio.
Now that we looked at some reasons why tracking income and expenses is a good idea, lets dive into HOW to track this information.
As promised, here is a link to free tool you can use in Google Sheets to track your income and expenses: 12 Month Income & Expense Tracker
There are more detailed instructions for how to use the tool listed on tab 1 of the 12 Month Income & Expense Tracker but we’ve provided a quick how-to summary for you here:
- Click here for the 12 Month Income & Expense Tracker
- Select the option to copy the spreadsheet in Google Sheets to get your customizable copy
- Enter your information on the tab corresponding to the current month.
- When you receive rent from your tenant(s), enter the amount of money you receive from each property separately
- Record any expenses you pay in the month under each property separately as well
- The Tracker will automatically calculate the total Net Income for each property showing you whether you made money on that property or not in a given month.
- The information entered for each month will also automatically fill in on the summary tab and show you your totals for the full year.
Tracking income and expenses is the first step in gaining powerful financial insights into your business. Stay tuned for next month’s article where we’ll show you how to use this information to predict the financial future of your business using a cash flow forecast.