Real estate investment firms are involved in multiple lines of property-related business. Most companies are property managers, renting and managing various types of properties, including commercial, residential, industrial, and mixed-use properties, among others. Some firms also acquire, develop, and sell properties. Some of these activities involve large cash flows and more extended time frames, while some involve consistent income, making it difficult to control expenses and maintain liquidity. 

Real estate accounting combines the various components of the real estate puzzle to track income, expenses, profits, and portfolio value for a real estate investment firm.  

How Is Real Estate Accounting Different

Property transactions are complicated. An individual buying a house or a company buying an office or land is the simplest form of real estate transaction. However, real estate investors have complex legal structures through which they acquire and dispose of properties. They may have separate entities to develop, lease, and maintain properties.

A real estate investment accountant:

• Employs complex legal structures (trusts, holding companies) to protect client interests. 
• Consolidates information from multiple entities, funds, and asset classes, which might be spread across geographies and currencies.
• Works with real estate agents, homebuyers, and landlords for the smooth execution of real estate transactions.
• Track property transactions related to ownership and operations, including income from rent, maintenance expenses, and property taxes, across diversified portfolios.
• Assess the impact of market fluctuations on the portfolio’s value. 
• Understand and complete tax filing and conduct necessary reviews and audits.

Challenges in Real Estate Accounting

Real estate is an asset-driven business, which makes it essential to constantly track the value of the asset portfolio and report fluctuations in fair market value. If you have a diverse portfolio of commercial and residential properties across different geographies, the accountant categorizes the assets into sub-categories based on your business requirements.

The real challenge is to consolidate all entries, track the impact of market fluctuations on portfolio value, and evaluate its progress against the firm’s key performance indicators (KPIs) at regular intervals.

But why track these fluctuations?

There are many other reasons for tracking these fluctuations, but a significant reason is that property transactions take longer. Property transactions often involve mortgages, which are granted based on the property’s value.

Performance Metrics in Real Estate Accounting

A unique business has unique business needs. A real estate accountant tracks various metrics to measure the company’s financial performance, as there are many moving parts. Here are some standard financial metrics you can begin with:  

• Revenue by property type: Accountants can break down revenue by property type, including commercial, residential, and industrial. This revenue includes rent/lease, management fees, maintenance, and service fees.
• Value of specific real estate funds: Accountants could break down the portfolio value by asset type (commercial, residential), location, and property size.
• Portfolio value over time: Accountants could consolidate the revenue, net income, and value of the complete portfolio over time to determine the assets under management (AUM) and net asset value per unit. It can show the historical performance of the company and help them analyze whether the acquisitions and dispositions have improved the overall revenue and portfolio value. External investors look at such metrics.
• Asset weighting: Accountants can break down the portfolio value by the weight of developed and undeveloped land, as well as the weight of different property types (e.g., golf course, residential, warehouse, retail). This can help businesses and investors analyze the earnings potential, as some categories yield higher returns. 

Accountants can compile and analyze such information to help property managers study their portfolio’s performance over time. Property managers can study emerging trends to make informed decisions and track the outcome of those decisions.

Core Accounting in Real Estate

While real estate accounting has its specific requirements, it also shares the generic requirements of tracking income and expenses, as well as preparing financial statements. Expenses include commissions, association fees, marketing and office expenses, vehicle expenses, and other activities incurred to sell or rent the property.

Depreciation, also known as capital cost allowance (CCA), needs a special mention. In real estate, the value of land appreciates, but that of buildings and renovations depreciates.

Hence, depreciation is calculated on the cost of the building and spread over its useful life to reduce the taxable income from the property. However, the depreciation claimed also reduces your adjusted cost base (ACB) and can affect the capital gain calculation when you sell the property. The calculations become complicated and require a professional touch to avoid tax miscalculations.

Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You with Accounting for Your Real Estate Firm

A professional accountant can help firms mitigate risks, boost liquidity, and support strategic planning by giving a clear overview of the firm’s financial standing. At Edelkoort Smethurst CPAs LLP, our accountants and bookkeepers offer services including preparing financial statements, tracking portfolio value, and filing tax returns. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with the best accounting and bookkeeping expertise, contact us online or by telephone at 905-517-2297.