How One Rehabber Outsmarted Quickbooks
A good friend just sent me a copy of a thread talking about different ways that real estate investors and flippers use their QuickBooks, more particularly when it deals with how they keep track of what they are spending while fixing up a house, whether it is to “keep” (investment), or “flip” (inventory). It appeared to me that the person making the inquiry hadn’t had formal training in accounting, and/or wasn’t comfortable with the difference between what goes on the balance sheet and what goes on the profit and loss statement, but I already like him. He uses QuickBooks to help him with his business, not to get a good grade in school or from an accountant. What he did (probably instinctively), is actually an advanced technique that more of his brethren might consider using.
Let me explain. What it looks like he is doing is putting the costs of fixing a property all on a profit and loss statement. It probably shows zero income, and maybe a couple dozen “categories” of money being spent (dare we call those expenses?). Good for him. Yes, it is wrong. Whether the property is being rehabbed for resale or to be eventually rented, all of the money spent on that property should properly be shown as additions to that asset. That asset can be a capital asset if you are an investor, or a (current) inventory asset if you are a flipper.
But he gets better information than most of the rest of you. If you want to know how much you have spent on plumbing, electrical, carpets, tile, drywall, labor, roofing, you have to maintain a separate spreadsheet for it, or do some manual calculations. That’s okay if you only have a few deals going, but it doesn’t lend itself to scaling very well. My new friend Frank (who I haven’t even met yet) just clicks his mouse. He has (probably) put each property in a separate “class” or “job” so he can easily pull up a categorized report on each property. Hopefully he or his bookkeeper puts in detailed memos of what everything is for. Wow, he can look every day and easily see what is being spent, already broken down in as much detail (in as many categories) as he finds useful to him. He can even see what he budgeted vs. actual for each category, or compare what he’s spending on that property compared to the last one he did.
Okay, his books are wrong. But they give him a lot more information, things that he can see himself. A good business owner has a dashboard, a list of things that lets him know how he is doing from many different perspectives, and for somebody who rehabs houses, the reports that Frank can easily see on each property (without having anybody between him and the books) are probably very useful.
Books don’t have to be “right” all the time. They just have to be right when it is time for them to be right. For taxes, bank loans, reports to investors, etc., yes they should be “right”. So how is that done?
It’s done with filters and the occasional adjusting entry, which also appears to be what Frank does. If he wants to know how the rentals are doing, he prepares a profit and loss for just those properties (just “checking” those classes). Anytime he wants to know how much to put into an asset account for each property, he runs a profit and loss for the properties he is rehabbing. Then he makes the appropriate adjustments. It is only a few minutes of work to move things around at the end of the year for tax purposes, etc., but during the year he has a de facto job cost report at his fingertips that helps him make decisions every day. Good for Frank.
Even accountants often have trouble seeing this. It is very hard for most of them to get past their training about what are “additions to basis” and what are “expenses”, and what QuickBooks labels them. My clients who understand this re-label their Profit and Loss statements for their properties in the process of being rehabbed. They will call a property report, for example, Job Cost Report on 123 Main Street from October 2014 through January 2015. No, they didn’t deduct those “expenses” at the end of 2014. The Profit and Loss statements that went to the accountant excluded those properties. They know the difference.
Looking at things this way makes me an “outsider” to most accountants (a nice word for saying they don’t like me). Story of my life — heck, even the forum moderator where I wanted to rush to Frank’s defense wouldn’t let me in. She, too, likes to do things “right”.
