With the recent surge in real estate investing, you have probably found yourself at least once or twice working on some detail related to real estate flipping – moving properties for a profit. The success of flipping real estate has a lot to do with managing the finances, especially related to expenses and equity accounts. So in this article, we will talk about how to do it properly.
Computer Or Paper Handling
Handling expenses and equity accounts can be a time-consuming and challenging process. That is where bookkeeping for house flippers comes in. Using the software will help you handle all expenses with no fuss.
And the first thing to know is if you want to use paper or a computer. Some people prefer using paper because if you make a mistake on your spreadsheet, all you do is just cross it out with a pen eraser and write in the correct number.
But when it comes to writing up the expenses, I would always advise using the computer. If you write expenses in your notebook, those numbers have to be reentered into your spreadsheets, which can take longer than expected.
Today’s accounting software for real estate flipping cannot only save your time and money but help you with taxes, reports, and other things.
What Expenses Should You Handle?
If you are just starting with real estate investing, you should begin to be minimalistic, just to get the hang of things and make sure that your business is running smoothly before expanding into new properties and renovations.
One of the many expenses you will have to deal with is property management – taking care of tenants, repairs, cleaning bills, and any other affairs that come up when dealing with tenants in your residential or commercial property. Here are some examples of costs that should be considered:
- Advertising: This is a simple one; there’s not much to write here. You may need to pay for advertisements in a local newspaper or real estate websites.
- Utilities: These are billed monthly. You need to pay another line of expenses here like your internet connection or office phone.
- Property Management: This is where it gets tricky. In order to be successful, you will have to hire a property manager for your house or apartment. They will help you deal with tenants and ensure that everything runs smoothly – from renewing the lease to writing up expenses for repairs.
- Repairs: These are pretty simple but make sure you factor in any potential costs for which you might be charged by your property manager as well as by the subcontractors who would be doing the repairs in your building, such as plumbers electricians, and so forth.
- Insurance: This is something that you cannot afford to skimp out on when it comes to your investments. If your tenant accidentally burns down the whole building or a natural disaster hits you, then there would be many financial losses involved – and in rare cases, even human life.
Costs Of Ownership
Costs Of Ownership
You will have to pay these costs even if your property is not working out as planned and you decide to sell it. I would suggest including these costs into your budget and factoring in any possible losses that might occur.
The following are some potential costs you should consider when calculating your expenses on paper:
Holding Costs
These are the fees you incur when holding onto a property owned by someone else. These fees can vary depending on where exactly the property is located, its size, and so forth. The following are some examples of holding costs:
- Interest Rate: Whatever interest rate your lender charges for the mortgage. In most cases, it will be around 4-5%.
- Property Taxes: The property taxes that you have to pay to use the property.
- Trespasser’s Insurance: A similar insurance you will have to pay for your own property. This is for incidents where someone tries to enter your flat or house illegally. Expensive and often doesn’t cover natural disasters like flooding or fire damage.
Transfer Taxes
These are taxes on both the seller and the buyer if they transfer ownership of a property within a specific period after being purchased by another person.
Closing Costs
These are the fees you will have to pay as a seller when you hand over your property deed to your buyer. This can vary depending on the property but within wide ranges.
Pay Yourself
People often forget about this because they think that even if they make a loss, it does not mean that they have to stop earning from what they do. It’s only a matter of time before your profits start rising and you’re making more than enough money to cover the expenses of doing what you do.
That is true, but a very important thing to consider here is the fact that while your profits may be rising, your expenses too will be going up. That’s why when calculating the profit numbers at the end of any year, you will have to take into account hire and pay yourself.
The Bottom Line
In order to be successful and profitable in the long run, a real estate investor needs to factor in all the above elements and more while working out their budgets. Even if you are just starting, you need to have at least a basic understanding of how each aspect works so that you will not be caught unaware.
Things do go wrong sometimes; your tenant may not pay his rent on time, and the property damage may be more than you expected. You will have to be prepared for any and all scenarios, from urgent repairs which require hiring a plumber or electrician immediately to dealing with tenants who want your house or apartment for themselves because it’s much bigger than what they can afford at the moment.
In conclusion, you have learned a lot about how to manage your finances as an investor. You can use these tips for your own business to become successful and profitable as well.
