It’s Not Sexy So Why Are We Writing About It
The major steps of acquiring, planning, executing, and then selling a property are generally considered and covered, but what about record-keeping? Granted, it’s not exciting, and it’s not sexy, so why do we think it’s worth covering? Because it makes a difference.
The main benefits of good record-keeping are:
- Knowing where you stand. As anyone who has been involved in larger construction projects will tell you: there are very extensive rules and processes to track work in process and percentage of work completed. While it’s probably not helpful to go that far overboard, the basics are worth looking at in order to understand the importance and how it applies to all projects, regardless of size. By tracking expenses and resource expenditures, not only at the end of the project, but all the way through, important decisions and adjustments or course corrections can be made all during the project. Including not only cash but also receivables and payables will help you manage expenses and make sure cash is available when needed. Budget vs actuals will help you determine when/if you have room for new cabinets, and when you’d better just reface or repaint. These types of calculations are made easy with good record-keeping and are impossible without; ‘wing it’, and you are almost certain to make a mistake.
- Co-mingling assets can ruin the protective features of your LLC. As Mick McGirr (Attorney at Law, Mick@PhocusCompanies.com ) points out, what the courts refer to as "piercing the veil" can occur when clear delineations are not made between what belongs to the LLC, and what belongs to an owner or other party. It is more likely to happen in a small company but can be easily avoided by being explicitly clear about ‘what’ belongs to ‘who’. It can happen quite innocently and unintentionally, for example, if you buy something for a project, and pay for it from your personal credit card and not record that specific expense in the LLC, but use a ‘catch-all’ or ‘true-up’ at the end, it could be argued you weren’t taking the LLC seriously, and then neither will the courts. Avoiding this is easy: separate bank accounts and good records.
- Fair reporting and distributions for partners. How do you know whose money is whose? And if there’s money for distributions and when? Complete, timely and transparent records answers all these questions and enables trust and good partnerships (and will reduce unproductive and unpleasant arguments). And if you are not using partners now, but considering them for the future as you take on additional projects, having clean records from past projects will make those initial ‘recruiting’ conversations easier and help in establishing fair arrangements.
- Accurate records mean you can avail yourself of tax benefits and be comfortable when/if you are audited. For example, you can include development costs, including interest expenses, to only be taxed on actual profits. And if you are doing this project in a self-directed IRA, you can ‘charge’ yourself fair labor rates for your work.
- Accurate records mean ease of refi and a shot at a lower rate. Jeremey Lovett, an experienced consumer mortgage officer (Jeremy@intentmortgage.com), points out “Borrowers who come in with well-organized records are going to end up with an easier and faster loan process. They are also more likely to benefit from a lower rate lender instead of having to focus on lenders who charge more for the extra time necessary to close unorganized borrower's loans.”
Record-keeping doesn’t need to be overly complex or burdensome. A spreadsheet will work, or software such as Quicken (at the low end) to QuickBooks (at the high end) makes things easy and has all the pre-canned financial and tracking reports. Add-ons such as Expensify or Zoho can make capturing expenses simple.