Creating a successful house-flipping business depends on properly analyzing the deal and having a professional team in your corner. Once you have identified the potential market and client, you’ll need a realtor to help find the right property and negotiate the right price, an inspector to help in creating the SOW, and a contractor to get the job done. That’s a lot to think about, but another critical team member is an accountant or CPA familiar with this type of business.
An accountant or CPA can help you set up an accounting system to track your income and expenses. They can help you develop a good strategy to take advantage of tax savings and stay right with the IRS.
Garrett Brown, with Bigger Pockets, has identified 5 areas where house flippers and lose money in his article “How Investors Lose Thousands Without Proper Bookkeeping.” Below are the 5 ways listed.
- Misclassifying Expenses
What is the difference between regular maintenance and capital improvements? Regular maintenance involves routine upkeep designed to prevent larger, unexpected issues from cropping up, such as regular inspection for appliances and HVAC systems, painting, or rodent control. Regular maintenance can be deducted in the same year. Capital improvements are larger investments, such as replacing a roof, and are depreciated over time. - Failing to Reconcile Accounts
Reconciling your books regularly helps ensure you have not missed hidden fees or even fraudulent activity. Monthly reconciliation will help you make better business decisions because you have a clear picture of your cash flow. - Not Tracking Cash Flow Accurately
Tracking your cash flow ensures you have the money on hand to tackle new business opportunities or unexpected expenses. - Neglecting to Leverage Deductions and Write-Offs
Small expenses such as your home office or even driving to check on your properties can save you hundreds of dollars a year when faithfully recorded. - Lack of Proper Documentation
If you are taking the deductions due to you as a business owner, have all the proper documentation – invoices and receipts for every transaction – or you are at risk for fines and penalties.
You can find a qualified accountant or CPA through referrals from other house flippers or through professional meet-ups. Look for someone who specializes in real estate investing or is preferably an investor.
