Being a successful real estate investor requires more than just market savvy. Hiring a CPA/Accountant may seem unnecessary, but real estate investments are not simple financial transactions. A CPA serves as more than a tax preparer; they are also a trusted advisor who can help your investments grow.
How do you know if you need a CPA? If you’re just managing a property on the side, but your main source of income is from your day job, you’re probably fine managing your books on your own. Many of the tips below still apply to you, and you may want to consult with a CPA seasonally to ensure you’re complying with tax regulations. However, if you are flipping or wholesaling properties as a full-time job, you’ll want to invest in a CPA for year-round expertise!
Read on to learn which situations CPAs can help you navigate and how to find the right advisor for your business.
Determine the right structure for your business
You may not think of it this way, but your real estate investment is a small business. You purchase assets, market your property, work with customers and manage finances. A CPA will help you determine the right business structure to protect your investments.
One option is to incorporate your business. Unlike a sole proprietorship, forming a corporation protects your personal assets in case of a lawsuit and lends legitimacy to your business. You can form a corporation at the federal or provincial level.
Forming a corporation can be complicated both legally and financially, especially when getting started. Hiring experts who can help you navigate the process is a worthwhile investment. Employing a trusted CPA will be especially handy when meeting the requirement for a separate tax filing for your corporation.
Separate your personal and business expenses
Whether you have a sole proprietorship or a corporation, it’s important to keep your personal expenses and expenses related to your property separate. Open a checking and savings account specifically for your business, where you can process rent checks and purchase items for the property without getting it confused with your grocery money. This will also make it easier to hand over your books to an accountant.
In addition to minimizing confusion, a separate business account offers a few perks. A separate business account is important for taxes: The CRA is more likely to investigate you when business and personal expenses are mingled. If you’ve incorporated, separate books will make things much easier for your accountant at tax time.
As with incorporating, a business account also adds credibility. Tenants can write checks to your company rather than to you as an individual. Depending on the bank, you may also receive special rates and benefits as a small business.
Track income and expenses with accounting software
If you’re not sure whether you truly need a CPA, you at least want to invest in quality bookkeeping software. Many companies offer tiered pricing so you can pay for the package that makes the most sense for your situation, whether you have one property or dozens. Cloud-based or desktop software will help you track rent payments and property-related expenses. These tools are available for up-front payments or monthly or annual subscription fees. There are a wide variety of options to fit your needs.
While you might want to start with a DIY method, accounting software can still be combined with CPA expertise. By having everything thoroughly documented and neatly prepared, an accounting expert can review your books regularly and offer financial advice.
Hiring a CPA
There are many kinds of CPAs and while all are chartered, not all are qualified to help your situation. You want to hire a CPA who not only has experience with real estate investing, but also is actively involved in the industry. You’ll trust your CPA to be up-to-date on regulations impacting your business. As your paid advisor, you want them to be even more knowledgeable than you on best practices! When interviewing CPAs, ask the following questions:
• What is your tax background?
• What kinds of clients do you work with?
• Are you available year-round or only during tax season?
• Do you use tax software? If so, which software?
• What records do you need from me?
• What happens if I get audited?
If you’re ready to hire a professional to improve your investments, find someone who is a good fit for your business, who you can trust. Hiring a CPA is adding a trusted advisor to your investment team; make sure they have the same goals as you.