The Financial Infrastructure of a Real Estate Investing Business
Financial Infrastructure sounds like a heavy topic, but in fact it's quite simple and very important for your Real Estate Investing Business. Essentially, how do you get your finances set up for success so that your real estate investing business is on a solid financial foundation, running smoothly and efficiently as you scale your portfolio?
As a fractional CFO, I see deep inside people's businesses and get well acquainted with their processes and procedures. The way a company's finances are set up can either help or hinder their ability to understand what's going on their business. One of my many roles is to identify bottlenecks in these procedures and provide guidance on how to make things more efficient. This way the company can have access to essential financial information in a timely and accurate manner which can then be used to guide business operations.
These are the 4 components of your financial infrastructure that you should have in place for your Real Estate Investing Business whether you're a beginner or a scaled investor.
1. Separate Bank Accounts
As soon as you attain that first property, the first thing you should do is open a separate bank account. In this way all of the finances related to the property are completely separate from your personal finances. This makes the tracking of your financials much easier and straightforward, especially if you're managing it yourself. If you're working with a bookkeeper they will thank you. As you scale and attain more properties, ideally you'll have a separate bank account for each property. However if that's too much for you, you'll have to ensure you keep great records so you can track the profitability of each property/project individually. In this way you can determine how well each investment is doing. In addition, I recommend having additional accounts to separate out the money you're saving for the future. This can include reserves for last month's rent, vacancy, capital expenditures, repairs and maintenance, taxes, emergency, etc.
2. Receipt Storage Solution
This is probably the area most people dread in their financial infrastructure. However, it's essential for when year end comes around and your tax accountant is looking for this backup. It's also extremely important in the chance you get audited, as they will be asking for documented proof that the income and expenses are related to your business. Set up a system that works best for you to make sure that you stay consistent throughout the year. This could be saving everything to a cloud-based folder like Google Drive, Microsoft OneDrive, Sync, Dropbox. Or it could be using an app synced with your accounting software such as QBO Self-Employed or Xero Me that will allow you to take pictures and have it upload directly into your accounting software. If you'd like a fully functional software specifically designed for receipt storage, there are also options such as Dext, Hubdoc, Expensify, and others on the market
3. Financial Tracking Tools
The number one thing I recommend is a cash flow tracker. At very least if you're not tracking anything else, this is the one thing you should be tracking. If you are a scaled investor and have a bookkeeper, you will also have access to additional reporting from your accounting software. Having a look at your Profit and Loss Statement as well as your Balance Sheet is a great practice. Better yet, if you're working with a Real Estate CFO, they will walk you through these reports and explain them in detail or create visuals such as graphs and charts highlighting the key areas and takeaways for the month. In addition, I also do recommend a reserve management tracker where you can keep track of the money you're saving for the future and its intended purpose. Lastly, utilizing your cash flow tracker to budget and/or forecast in order to analyze a property or project out months in advance to see if you have any issues on the horizon is an excellent use of the tool.
4. Power Team Support
Financial management is not everyone's strong suit, so in terms of support, the first thing to do is invest in some education especially if you plan to run a do-it-yourself model. This makes sense if you're a beginner and want to stay close to your numbers. Of course, this option takes up the most amount of your time. If you're overwhelmed doing it alone or have started scaling, you'll want to consider adding finance professionals to your power team. The three finance professionals I recommend are a bookkeeper for complete data entry, a tax accountant for year-end filing and planning, and the core who keeps everything together, your real estate CFO; to provide insights, strategy, planning, risk management, and overall financial oversight on all things finance in your business.
Getting these 4 components of your financial infrastructure in top shape will help you create efficient financial processes and procedures in your business. This will allow you to have crucial insights into your business performance and outlook which will then become one of your greatest business tools.
If you're looking to gain some education and invest in a proven Do-It-Yourself financial system, check out our newly launched CFO-Yourself Downloadable Program! It includes a Financial Foundation eCourse with the 4 Steps to Financial Clarity, a customizable Cash Flow Tool and one 45 min virtual touchpoint with a Real Estate CFO. If you're a scaled investor thinking about partnering with a Real Estate CFO, book a Discovery Call with us and let's chat further on your specific situation!
