Accounting and Record Keeping


120 comments

[NOTE: I get a lot of requests for my Quickbooks Chart of Accounts these days. I have now included the Chart of Accounts as part of the special goodies when you buy my Flipping and Estimating books. Click here for more information!]

I receive a lot of questions about my company’s method for accounting and recording keeping for our rehab projects. For those who have been in this business for a while, you probably have your own system that you rely on and that works well for you; for others who are just starting out, hopefully this will give a framework for thinking about these types of things…

First, I use Quickbooks for all my accounting and financial record keeping. I used Quicken for a LONG time, but finally realized that I’d be much better off porting my Quicken data over to QuickBooks; my accountant is highly appreciative of this as well.

As for how I break down my financial view of a house flip, it looks something like the following:

Purchase Costs

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 Quickbooks); 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

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

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

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. We 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.






120 responses to “Accounting and Record Keeping”

  1. David says:

    Hi J,
    Let’s say you bought a house for $100K, put down $20K and borrowed $80K. If you record the transaction as a Flip Costs:Purchase Costs:Property Purchase expense, is the value $100K or $20K? If it’s $100K, where do you record the $80K you borrowed so you can track your initial equity?

  2. J Scott says:

    Hey David,

    On the General Journal entry, the $100K would be a Debit against the “Flip Costs:Purchase Costs:Property Purchase” account and then there would be an $80K Credit against the “Mortgages” account (which is a Long Term Liability). The $20K difference would be a Credit from a cash account (the funds you brought to closing) to even out the entry. Obviously, there would also be closing costs and other stuff in there as well, but that’s the basics of how the loan is handled.

  3. David says:

    Well that makes a lot of sense. Thanks for helping out. I’m a big fan of your blog and books and look forward to your future reporting on rentals.

  4. Dan Baker says:

    Good morning,
    I am a full-time investor in N Idaho (we did 15 last year, already have done 5 the first 3 months this year). About 1 in 4 properties I flip are rentals. My accountant believes we should separate the rental income from flip profit because there are different rules regarding deductions. This causes a lot of extra work, which doesn’t feel warranted given that the rental income is such a small number compared to the flip profit. Do you separate?

    Thanks

  5. J Scott says:

    Hi Dan,

    We absolutely do separate the income. We flip in one business entity (multiple actually) and hold our rentals in a separate entity. The flip income is going to be subject to ordinary income taxes plus self-employment taxes, while the rental income is only going to be subject to capital gains taxes. The difference there could be between paying 50% in taxes and paying 20% in taxes!

    Even if you’re just making $20K per year in rental income, that’s a $6K savings by separating the income. Obviously, the more you’re making, the bigger the savings is. And, in my opinion, that’s not insignificant. In addition, you want to ensure that when you sell the rental properties, they are taxed at long-term capital gains rates, not ordinary income.

  6. Cole says:

    where do you account for cost outside of these categories but would be business expenses none the less? My initial thought would be any expense related to finding the property (I.e. gas expenses or MLS fees etc.).

  7. J Scott says:

    Cole –

    Those are business expenses (independent of any property), and are categorized separately at tax time. These things are often categorized as “overhead”…

  8. Tony says:

    Hi
    I have question regarding Quickbook. Do you explain in your book step by step how to set up accounting sheets in quickbook. I am an experienced flipper but now need to get organized

  9. J Scott says:

    Hi Tony,

    The book doesn’t explain how to use Quickbooks or do accounting, but if you purchase direct from the publisher, it does include my Quickbooks Chart of Accounts:

    http://www.biggerpockets.com/flippingbook

    There are lots of different (and correct) ways to do your accounting, and every situation will have different accounting needs and requirements — it would be impossible to discuss this in a way that’s general enough for everyone in my books. But, the COA can probably get you started, and a chat with a good tax professional will help even more so!

  10. Diana Gay says:

    Could you please send me your COA for QuickBooks? I’ve just started flipping homes and would love to make sure I am setting up my accounting system the best I can! THX!!!

  11. J Scott says:

    Hi Diana,

    The COA comes as part of the book package sold here:

    http://www.biggerpockets.com/flippingbook

  12. Marie says:

    I am late in the game. But I just purchased a book from Gita Faust on how to use quickbooks for flipping properties. After I followed her easy step I was able to view property costing by each flip. She says no to journal entry and no to learning debit and credit. I was laughing when she said it on the call. Now I get it.

  13. Jim says:

    Aren’t the profits made in less than 12 months considered short term capital gains, like a stock purchase / sell? Thus both Federal and States taxes may be as much as 33% of the profit during a fiscal year.

  14. J Scott says:

    Jim –

    Profits on a flip (regardless of how long you hold it) are taxed as ordinary income at your marginal rate — NOT capital gains. This essentially equates to the same rates as short term capital gains, but you can’t offset them with capital losses and you’re generally subject to self-employment taxes as well. Ultimately, house flipping is a horrible choice for someone looking to minimize tax burden.

  15. Kevin says:

    I have QB2016 for Mac. It won’t read a normal .qbw file. Anyway I can get your chart of accounts in a Mac version. Intuit says it can be created from the Windows side (that’s the only way). Thanks!

  16. Kevin says:

    I guess I should retract that last comment and start over. My son purchased your book through BiggerPockets, but we can’t figure out how to access the COA (or other digital content). Can you direct us? Thanks.

  17. J Scott says:

    Hey Kevin,

    If your son bought from BP, he should have gotten all the digital files as part of the zip file (if he was able to open up the books, the rest of the files should have been right there in a separate folder). The COA is a Microsoft Excel file. The easiest way to import it to Quickbooks is:

    Go to File menu> Utilities> Import> Excel Files

    From there, follow the prompts…

  18. Pam says:

    What if you buy a house to flip and decide to hold. How do you transfer between the 2 companies?

  19. J Scott says:

    Pam –

    There are a couple ways to do this (quit claim deed, second closing, etc), but there are tax and legal nuances with everything, so I would recommend talking to a good tax professional and/or attorney to guide you through the process.

  20. Shawn says:

    If available could you provide me with your Chart of accounts as well?

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