Pssst - Wanna Be a Real Estate Millionaire? (Part 17)

Chapter 17: The (Dreaded) Paperwork

It’s a nasty job but somebody’s got to do it. It may as well be you unless you can sweet-talk your spouse into doing it for you. Record-keeping is a necessary evil. Not only do you have to do it to keep the IRS happy, you need those records to make sure you’re still making a profit. I’ve lost count of how many people have told me they’ve owned millions of dollars of real estate but didn’t have enough cash with which to pay the monthly bills. Four out of 5 businesses fail within the first 5 years because the owners don’t know how to manage the business. If you don’t keep records, this is an easy trap into which you can fall. It’s one of the reasons I was so adamant about insisting on a minimum 10% triple-net return. It is one of the reasons I’ve been so insistent that you not write checks or promise to pay other people’s mortgages. If you can’t quickly convert a property from a money-looser to a money-maker, get rid of it quickly. Give it back to the person from whom you got it and just walk away. There are plenty of profitable deals out there without having to struggle with a money-looser.

Good record-keeping goes hand-in-hand with minimizing income taxes. I’ll presume that you live in your own house but you drive to visit your investment properties. The mileage between your home and your investment properties is tax deductible as a business expense. Keep a log accordingly. I use a weekly planner and simply jot the mileage in the planner as I go. With multiple investment properties, I allocate mileage accordingly to each property.

We’ve talked about repairs. Repairs are tax-deductible each year. Keep an accurate record of what you did to each property and keep the receipts to back up those expenditures on a property-by-property basis. You will note these expenses on Schedule E of your personal income tax return whether directly or as a result of Schedule K-1 inputs from your various limited partnerships.

You will attend investment seminars. These seminars will be considered on-going education for your real estate investment business and the costs will be deductible. Keep records and receipts.

You will travel to inspect your properties and perhaps purchase additional properties. Keep records and receipts. These trips are tax-deductible even though you may also enjoy the associated vacation while you’re looking for property – hint – hint – wink - wink.

When you’re just getting started, probably the simplest record-keeping method you can use is to set-up an Excel spreadsheet. You’d use one for each property and if you have a multi-unit apartment, you can break-down the records on a unit-by-unit basis. After your real estate program has grown in size, you can switch to more formal software programs and/or hire formal professional management who will have their own record-keeping and report software.

Accurate and complete records are important because in addition to helping you verify that you’re making profits, those records will also help you get top dollar for the property when you’re ready to sell. If you think back to our discussion of how investment property is priced based on NOI, the key question is the accuracy of that NOI. What better (and totally professional) way to prove to a would-be buyer that your numbers are accurate? You have detailed operating records of your property so the buyer can see for himself that everything you’ve told him is correct. And because you present that information in a professional manner, you establish your creditability as a trustworthy seller. Wouldn’t it have been nice if the person from whom you originally purchased the property had been equally professional? The easier you make it for a person to do business with you, the more successful you will be. As long as you have to keep records anyway, why not make those records work for you as an additional sales tool?

NOTE: Stay tuned for Part 18