How to Stop the Overwhelm of Real Estate Paperwork

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Well, so much for the paperless society we were promised two decades ago! The reality is that as real estate investors we are STILL overwhelmed with paper. Unfortunately, there are still professionals working in real estate that are using paper everyday. We are still, very much, behind the times when it comes to technology (although I do know some business professionals who use a document management software from somewhere like FilecenterDMS to help make their lives easier. I don’t understand why more people don’t use software like this!? Paper when we buy, monthly paper when we operate, paper when we sell… and each sheet needs to be kept in most cases for seven years or more.

Speaking of software, real estate professionals can make use of different developments in the tech world to make their jobs a lot easier. Not enough real estate professionals have made use of the software that is made available to them, like this brokermetrics service; these integrations will create end to end workflows for your brokerage. Why is this not being taken advantage of?

It is VERY easy to get overwhelmed with paper unless you have a SIMPLE (critical) system to keep it all under control, organized and easily accessible.

The Truth: It Can Stop Some in Their Tracks

Once you begin down the road of investing in real estate, you open up whole new realm of paper flow. Like any business, no matter how much you attempt to do online, there is the inevitable paper work that needs to be kept under control. Get behind on it, and you lose money on taxes and fees and can set yourself up for pain during audits, evictions or reviews with your joint venture partners.

In fact, I have heard of some investors who stop building their portfolio because the properties they have already create more paperwork than they can handle. What that tells me is that they don’t have a simple (and efficient) system to control every piece of paper they receive.

The Solution to Winning the Paper War Begins with an Easy to Use File System (Yes, that’s right, “old school” files!)

By adopting a system that is easy to use and simple in design, not only will you begin to buy back your time, you will also save on taxes and tax preparation costs. Both of these savings will go directly into your bank account.

As I am sure you have heard me say before, it is not about how much money you gross, it’s all about how much money you KEEP.

The Power Paperwork System was developed and refined throughout the years by the members of the REIN. It is easy-to-use, is compatible with Canada Revenue Agency rules regarding paper trails, provides the best results over time, and can be used when buying and operating single or multi-family properties.

Of course, some investors will take this proven system and refine it even further to fit their lives (or their drive to ?geek out? and make everything electronic). However, the foundation all begins with this system.

Put this in place now ? or set it up before you buy your first property!

What do you need to do?

1. Buy a 4-drawer legal-size filing cabinet.

This is essential. It would be amazing if it wasn’t a requirement; however, “the paperless future” is still long into the future. The legal documents and paperwork you need to file your taxes must be kept in an accessible place. This is the absolute best way to do that. Skip the 2-drawer cabinet, even if a 4-drawer feels like too much, because as you build your portfolio, and you operate it over the years, you’ll eventually need the extra drawer space. Don’t cheap out and get a small 2-drawer.

2. Buy good quality file folders and hangers.

You need four different colours of folders and hangers: red, yellow, blue and green. Every time you buy a piece of real estate, add four new file folders to your cabinet. Again, don’t cheap out on the hangers (they will drive you crazy as they rip, or turn out not being big enough to hold all of your documents). Here is a breakdown of what each of the four colours means:

Red – For all tenant information. This includes all rental information, move-in and move-out inspections reports, the completed tenant questionnaire, lease or rental agreements, and ALL correspondence with the tenant. Also include a CD or USB of property pictures (taken before move-in/during inspection). Make sure you capture a few pictures of the tenant in the property pictures as proof of attendance. YES, you need to put them on a CD or thumb drive so that even if your hard drives fail or you change providers, you have this important visual record.

Each TENANT gets his/her own red folder. Even after they have moved out, you archive these documents in these folders (in alphabetic order) in case you reference them in the years to come. (You’ll be amazed at how often, as a geographic specialist, a tenant, either good or bad, will show up on your doorstep or the doorstep of one of your investor friends, years after they left you). I suggest you keep all of your notes in here as well.

Yellow – For property miscellaneous. This is where you put general property information: warranties, a copy of your master key, and all maintenance and inspection information. This is a good place to keep your renovation records, your measurements, model numbers, paint colour numbers, suppliers, etc. Make it SUPER easy on yourself by having it all in one place. You’re going to get the paper anyway, might as well file it within easy reach.

Blue – For all legal documents. Because this file won?t be accessed very much after closing, I put all of my blue files into the bottom file drawer. It includes a copy of the offer to purchase, all due diligence documents, the Real Property Report or survey (or title insurance certificate), the appraisal and all closing documents. That mass of documents you receive from the lawyer?s office a few weeks after closing all go in the blue file folder. In most cases, you don’t have to reference this until you sell, but there have been times where having this within reach has saved me hours of searching.

Green – On-going monthly receipts. This is the file you will open most often. It holds all of the receipts for any expenses related to that property. At the end of each month, gather all of the receipts from a file and put them in an envelope marked with the month and year. On the outside of the envelope, list the company name, the amount paid for each receipt and the classification – see list below to ensure that the classifications match up to latest CRA categories (office expenses, publicity, and maintenance). This greatly speeds up your computer accounting records, makes it much more simple if you are ever audited or need to refer back to a purchase, and provides a replicable record if your computer crashes.

Once all of your end of month expenses are in the envelope and noted on the outside (and given to your bookkeeper for entry into your accounting software), you can move this envelope out of this drawer into an archive box with the previous month’s envelope.

VERY Important:

Each property must have its own green file folder. Keep your expenses separated by property. In fact, if you are buying for a few properties on one trip to the hardware store, have them as complete separate transactions with separate receipts.

3. Keep your accounting records up-to-date.

All of the receipts in your green files must be entered into your QuickBooks-style accounting program (or the program your bookkeeper uses) at least once a month. The longer you wait, the bigger the job it becomes and the less accurate your property portfolio analysis becomes. Doing this monthly is especially critical if you have joint venture partners, who should be able to, at any time, request a financial update from you that is accurate and fast. When it comes to financial matters like bookkeeping and running the payroll, businesses may decide to use something along the lines of Cloudpay’s payroll software in the EU or wherever they are located, as they help businesses globally with ensuring everything is standardized and complies with what it should.

Lesson Learned: Always write all of the key details of the receipt on the actual paper as soon as you incur the expense. Memory is good, but not 100% accurate. So many of us are lazy when it comes to this important step; however, if you ever want to ensure that your legitimate expenses aren’t declined in a future audit, take the 30 seconds to hand write on them. Doing so is like money in the bank.

Your accountant will love it; your accounting fees will be reduced, and it?s a wonderful way to answer an auditor?s questions!

Red flag: Legitimate expenses will be denied if you don?t keep receipts and you have clearly marked what legitimate reason they were incurred. Be VERY clear on your descriptions.

4. Establish a classification coding system.

Keep track of individual expenses with a proven classification system, if you’re wanting to code your own classification system, you could learn more about teaching yourself coding through various internet resources. According to information from the Canada Revenue Agency (on form T776), a statement of expenses related to real estate rental investments can be classified according to the following:

1. Advertising
2. Caretaking
3. Financing & borrowing costs
4. First mortgage interest (please remember, you only can write off the interest portion of the mortgage payment)
5. Second mortgage interest
6. Condo fees
7. General repair & maintenance
8. Insurance
9. Legal & accounting
10. Property management
11. Property taxes
12. Utilities
13. Auto

5. Use your system to save money!

Get into the habit of tracking expenses as you go. By using the file folder and monthly envelope suggestions outlined above, you will make it very easy for your bookkeeper and accountant to advise you about how your portfolio is performing. These systems also save you accounting fees and allow you to make decisions based on facts, not emotions.

I imagine that most investors, if they happen to come across a $5 or $20 bill on the sidewalk, would make the effort to bend down to pick it up. But at the same time, I witness these same investors not bothering to keep their $5 or $20 receipts. They are worth the same as cash (some could argue they are worth more), so treat them that way.

Key insight: Set up a simple spreadsheet or accounting program so you won?t miss out on all the deductions for simple things like a box of Tim Horton?s doughnuts for your banker, or a box of nails for your renovation. With a program like QuickBooks, you can set it up to press Control+D every time you enter a doughnut receipt. Want to make your bookkeeping really easy? Don’t do it yourself; find a good professional bookkeeper (get a recommendation from your fellow investors). The money you spend on a professional frees up your time, reduces your frustration and compels you to continue to build you portfolio. You don’t make money entering receipts into a computer; you make money finding and buying quality properties ? that is where your focus should be.

For more tips and tricks, visit REIN?s real estate discussion forums at www.myREINspace.com. Find the answers to the questions you have. You’ll be tapping into the brains of thousands of fellow investors. Check it out today: www.myREINspace.com

began his investing career in 1985 with a house purchased in Mission, BC. He is the Senior Analyst at the Real Estate Investment Network and currently owns nearly 200 doors in BC and Alberta. A seven-time best-selling author, Don?s expertise and passion for teaching Canadians how to create wealth through real estate are far-reaching and have made an impact on the lives of thousands. You can follow his daily thoughts on Twitter ? www.twitter.com/ and on Facebook at www.facebook.com/thereinman.

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