A couple people who also flip houses have asked me about my method of accounting and recording keeping for the work that I’m doing. I wanted to give a quick summary, which will hopefully help explain why I group costs and financial data in the way that I do. For those who aren’t in this business, this post will probably be pretty boring, but hopefully for others who are starting out, it will give a framework for thinking about these things…
First, I use Quicken for all my accounting and financial record keeping. I know a lot of people prefer QuickBooks for business accounting, but I find it to be a bit too cumbersome for my current needs. If necessary, I’ll port my Quicken data over to QuickBooks at some point in the future if I ever decide to switch.
As for how I break down my financial view of a house flip, it looks something like the following:
This group accounts for all costs incurred up until the day I own the property. This includes any earnest money deposits, inspections, appraisals, financing fees/charges, closing costs, bank credits, etc.
I like to keep this as a separate category because this group of expenses represents costs that I’ve incurred not just on the properties I flip, but also on some properties that I investigate but don’t end up purchasing. For example, if I put a property under contract, hire an inspector to do a property inspection, and then later back out of the deal, I still need to account for those inspection costs.
That said, I keep a close eye on this group of expenses (I have several reports that I run once a month in Quicken); because there are a lot of “sunk costs” (costs that are never recouped) in this area, I try to ensure that I do everything possible to keep expenses in this area as low as possible.
Rehab costs are all costs associated with both materials and labor during the rehab. Material costs consist of everything that gets purchased for the property and will stay with the property (materials used for staging that will be retrieved upon sale are not counted). Contractor costs include everything from the GC to the landscaper to the termite inspection to all the other sub-contractors I might hire.
In short, rehab costs are essentially anything I spend to renovate the property.
Holding costs are those costs that accrue the longer I hold the property, generally monthly. This includes any mortgage or loan payments against the property, property taxes, insurance premiums, utility payments (water, electricity, gas, garbage, etc), lawn care (once the rehab is complete), etc.
Selling costs are all the costs accrued in order to sell the property. This includes commissions, any closing costs I might pay on behalf of the buyer, selling closing costs, any mortgage or loan payoffs, etc.
This category also includes items required by the buyer as part of the purchase contract. For example, if the buyer requires a termite letter, that would be included as part of the selling costs. In the case where the buyer requires that a repair be performed that should have been performed during rehab, I may attribute the cost to Rehab Costs.
Lastly, any refunds or over-payments that are returned to me — such as escrowed funds or insurance over-payments — are also attributed to selling costs.
I’ve found that this system of managing and organizing expenses is very effective for the way I think about this business, and I extend it past just my financial management software. I keep four folders for each property (Purchase, Rehab, Holding, Selling), along with a “Receipts” folder; these coincide to the financial groupings that I use so it’s generally pretty easy to find and cross-reference items when I need any property information.