Top 10 pitfalls of real estate financial reporting

The relationship between business owner and accountant is paramount to the success of a real estate business, in particular when it comes to your financial reporting needs. That’s why Zeifmans has spent more than 6 decades putting relationships first; building our business based on our care, attention, and future visioning so that our clients achieve the success they deserve.

That being said, there can be discrepancies between the expectations of a business owner and how their accountant can best deliver. Today, we’re going to examine these further to help you make the most of your accounting services. Here are the top 10 pitfalls to avoid when it comes to real estate financial reporting:

1) Accrual vs. Cash Basis accounting
Cash is King, right? It’s true. Even though accrual accounting is empirically considered to be the best method (it takes into account receivables and payables, providing a more accurate look into the future), cash basis accounting makes tracking cashflow easy. If your business is showing a profit but has weak cashflow, you may not be in a good place financially.

2) Disclosure discomfort
Clients are often averse to disclosing certain pieces of information, such as ownership interest held, or investments within a holding company. And while disclosing this information can feel like a big step, it is necessary to do so in order to align with regulatory requirements. Your accountant is your friend and is trying to help you! The more information you provide up front, the easier it is for your accountant to get the job done.

3) Records rehab
If you keep your records clean and organized in preparation for working with your accountant, the process goes much more smoothly. Document everything, because banks and CRA will need to see all this information. In an ideal world, your records should be so organized that they could change hands to a new accountant seamlessly and without too many questions.

4) Real-estate specifics
Real estate business accounting is its own unique animal with many distinct and detailed subject matter areas. Your accountant should have subject matter expertise so that they can advise you on issues such as:

  • Free rent periods
  • Straight lining of rent
  • Tenant inducements
  • Share issuance costs
  • Financing fees
  • Allocation of land and building
  • Depreciation of building

Working with a subject matter expert (like Zeifmans) will ensure you’re set up for success, utilizing every possible facet to your advantage.

5) Capitalization vs. expenses
Further to #4, understanding the difference between bringing a property back to its original state versus improvements, and the nuances around expenses on raw land can make the all the difference in terms of taxation and financial reporting. Deductibility of interest and taxes on vacant land is a complicated matter in Canada, with many rules and provisions that vary on the basis of whether the land is utilized as a rental or strictly being held as-is, etc. It’s worth it to speak to an advisor who understands the subtext and history and can advise accordingly.

6) Inventory vs. capital
This is among the most important distinctions for real estate businesses to understand when it comes to reporting.

Capital property
– Used to earn income
– Gains are often capital in nature
– Depreciation is often taken

– What is actually sold to make the profit and income is not capital
– Depreciation is not claimed
– Income is business income when sold

A great example to keep in mind is: An apartment building where rental income is earned is capital. Homes that are developed and sold are inventory.

7) Teamwork
Teamwork makes the dream work. And yet, so many business owners keep their experts separated into silos. The best and most profitable real estate businesses connect all their experts to work together as a team. Take the time to put your bank, accountant, and lawyer in touch with each other so that they can create synergy on your behalf, working from the big picture towards your long-term goals.

8) Understand the entities
It’s important to understand the roles of your corporate structures, and really have a grasp on which is the financing entity and which is the reporting entity, as well as which entities are passive or inactive. If you have an understanding of the purpose of each entity and what they are used for, as well as where to record transactions and what your financial reporting needs are, then when the bank or lender asks for a report on the company, you will know exactly what to supply.

9) Tech support
We can’t ignore the fact that technology plays a significant role in this process. Maintaining an effective IT system and utilizing software to full capacity will allow you to carry out all your responsibilities in an organized manner, setting you up for future success.

10) The long game
Rather than approaching your financial reporting like you’re putting out fires, it’s best to play the long game. Prepare for the future by creating a multifaceted plan in collaboration with a team of experts. As your company grows, you’ll be able to pull from your team, act according to your plan, and check off milestones along the way. The first step to playing a long game is signing with the right partners. Enter Zeifmans.

Work with the experts
For over 60 years, the real estate business experts at Zeifmans have been partnering with successful business owners in achieving their short and long-term wealth optimization goals. We’ve witnessed the market in a variety of conditions, and we’ve weathered many storms. Together with our clients, we provide wisdom and strategy that carries their real estate business upwards to new heights.

What are you waiting for? Give us a call today and let’s get started.


Q&A with Partner, Jennifer Chasson

Q&A with Partner, Jennifer Chasson

With over 25 years of experience and 100+ successful transactions under her belt, Partner, Jennifer Chasson, brings invaluable expertise to the table. Whether it’s guiding as an advisor, mentor underwriter, ...