Published 3/16/21
Managing a rental property can be a pain in the backside, especially if you’re expecting a real estate audit. Instead of dreading that Godawful date, what you need to do is to make sure your property complies with regulations and strict accounting standards.
In short – you need to get audit-ready.
What Do Real Estate Auditors Look For?
To put it simple, your auditors will look for accountability and accuracy. Don’t mistake their painstaking process for hostility because they will never try to trick you on purpose. What’s more, a real estate audit never has a pass/fail outcome.
In reality, a real estate audit only tries to streamline your business practices based on state and federal regulations. In other words, they try to make your real estate business legitimate for the benefit of your investors, partners or tenants.
When Can You Expect a Real Estate Audit?
Depending on where your rental property is located, you will need to be audit-ready in order to be able to provide monthly reports and accountability check-ins. In contrast, some areas may be subject to random audits or when someone files a complaint against the property.
If you can’t seem to find any clear audit schedule for your neighborhood, this does not mean that you are immune to unexpected visits. You see, even the IRS may request your banking documentation and financial records for an audit.
By Getting Audit-Ready You Will…
- Feel a lot less anxious about the audit
- Make the process easier and painless
- Be more aligned with state and federal regulations
- Have up-to-date accounting records
- Be prepared for annual tax reporting
- Reduce legal and financial risks
How to Prepare for an Audit
1. Dedicate Your Spare Time to Data-Entry and Analysis
Prepare accounting statements and analyze your entries whenever you find time to spare from the office or household chores. Of course, if you’re concerned about the shortage of time, you might have to manage office hours in a manner that you can prioritize data-entry accordingly.
2. Don’t Take Shortcuts
It might seem like a good idea to skip some details, but don’t expect your real-estate auditors to be as forgiving. What you need is an accounting software that summarizes your accounts with brutal detail and splits them into memos, invoice numbers, transactions, and document checks.
Once you get a hang of the software, all you need to do is enter quantities and, perhaps, notes alongside each transaction to annotate correspondences or phone conversations. You can also use some rental property accounting softwares to set reminders to update your compliance documentation and business licenses.
3. Don’t Get Too Creative
The only things you accounting software should help you summarize are:
- Rental property transactions
- Tenants moving in and out
- The receipt and returns of security deposits
- Proof of transactions.
4. Conduct Your Own Audits
In doing so, you might come across accounting errors or problems in business documentation and licenses. To help streamline your own in-house audit, you should implement bank reconciliations, review your documents and always check-off what you’ve audited in a checklist.
5. Focus on Transparency
Transparency helps reduce the signs of clear mismanagement, fraud or commingling. By adding more transparency into your accounts, your auditors will be satisfied with the degree of detail and accuracy in your ledgers.
Need Assistance?
You can always hire an experienced property manager, to streamline your tasks for you. By hiring a property manager, your real-estate business will be audit-ready in no time and all you will need to do is make all the decisions or follow-up on their activities whenever your schedule allows you to.
– Jivko Stefanov
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