Real estate accounting has a lot of moving parts. Developers need to keep a close eye on the following considerations if they want to run their businesses as effectively as possible and understanding how to use accounting software is a critical part of this process. 

Real estate developers need to track their numbers closely to understand the profitability of their projects, attract investors, obtain financing, and stay compliant with income tax reporting requirements. How well they understand these reports, and approach real estate accounting will determine their level of success.

The reports real estate investors should focus on vary based on their objectives and their project's progress. Investors who plan to develop and flip a property typically focus on the balance sheet, which provides an overview of the development's profitability based on the developer's assets and liabilities. 

In contrast, someone who uses their real estate to generate rental income should focus more closely on the profit-and-loss (P&L) report, which helps you see the expenses versus revenues during any period, by increasing distributions and maximizing cash flow.

By extension, if developers are acquiring a property to rent out, they should focus more heavily on the balance sheet during the development stage and on the P&L when they rent out the units. Good accounting software will generate both reports as well as many others, but your real estate activities dictate which reports you should study most carefully.

Key balance sheet accounts for developers who are building and planning to sell are Sales, the sale of units or apartments (usually condo or retail space) and Cost of Goods Sold (COGS), total construction normally is broken down by square footage or actual cost.

These are a few key examples of what you will see on a real estate developer’s financial statement. The two most important accounts will be the CIP (Construction in Progress) or WIP (Work in Progress) Accounts. Most developers rely on a job costing accounting system to track their work.

When setting up real estate accounting software, ensure that the chosen accounts give the most efficient insights into the development operations. For example, a land or building developer may need to set up accounts for accounts payable, cash, CIP, WIP, deposit receivables, equity, long-term debt, short-term debt, retainage, and more.

A landlord, of course, doesn't need to track WIP or CIP, but they may need to add additional accounts that allow them to track specific expenses related to their rental operations.

When developers are acquiring real estate, they need to track the COGS, which is the total of different expense accounts in their real estate accounting records. COGS refers to all direct expenses involved in developing their property, including paying electricians, hiring architects, obtaining permits, and buying building materials. Indirect expenses, such as paying an administrative professional to run the office for their real estate development firm, are not included. 

They may want to break down COGS per square foot or use this number to create profitability ratios. This allows them to compare the profitability of different development projects, and the better they understand their costs, the more effectively they will be able to generate projections and estimates for future projects.

In real estate development accounting, hard costs are construction costs associated with the actual physical construction of the building or project. On average, hard costs make up 75-80% of the total new construction costs. However, it is worth noting, hard costs on a renovation project are often higher.

Soft costs are part of the overall development project, but not tied to the actual physical production of the asset. They deal more with consultants and the planning of the project. In most cases, the soft cost is pre-construction cost, and most of the costs are incurred prior to the start of construction. Additional soft costs include engineering (mechanical and/or structural), permits & approvals, inspections, legal, and insurance.

The other time of “soft cost” paid at the beginning of the project and during construction are Financing Cost. During the pre-development stage of a project, some of the Financing Cost you will see on a Balance Sheet are Bridge Loans, Appraisal fees, Construction Lender Fees, Financing Fees – Brokers. Once a construction loan is obtained, some of the Financing Cost you will see are Mortgage Recording Tax, Construction Loan Interest, Exit Fees to name a few. 

Real estate accounting starts long before a developer ever break ground on a project. They need to be able to make accurate financial projections about prospective property acquisitions based on market data, construction costs, and their proposed schedule. They also need to make assumptions about the sources and use of funds from their initial cash requirements to the end of the project. 

As the project gets moving, they will need to simultaneously track real costs while also continuing to make estimates and projections about the future. They will need to keep an eye on their burn rate and create rolling cash flow projections so they can identify potential shortfalls early and make a plan to avoid them. 

As their project moves forward, they will need to find a balance between the design and their budget. Throughout the project, they are likely to produce numerous budgets, and they may need to refine their design choices to stay in line with them. Ultimately, they need to strike a balance that allows them to minimize both delays and cost increases while maintaining the quality of their project. 

Design costs are just one element — real estate accounting requires them to manage multiple costs and constantly identify strategies for savings. For example, they may want to find ways to reduce costs in the vendor procurement process.

Real estate accounting software helps developers stay on top of all these elements in the most effective way possible. But learning how to implement and utilize real estate accounting software can be challenging. Contact SX Business Services so we can help alleviate confusion and operate your Real Estate accounting practices more efficiently. The body content of your post goes here. To edit this text, click on it and delete this default text and start typing your own or paste your own from a different source.