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Bookkeeping Essentials For Note Investors With Debbie Mullins

December 29, 2020

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GDNI 133 | Bookkeeping For Note Investors

 

Bookkeeping is arguably the most important of any business, including note investing. If you’re looking to run your own note investing, you need to start with your books right from the get go. You can be your own bookkeeper instead of hiring one but either way, you’d need some knowledge of the essential things that you need to do with your business to keep your books your friend instead of your worst nightmare. Joining co-hosts Chris Seveney and Jamie Bateman on the show to discuss these bookkeeping essentials at length is Debbie Mullins, the owner of a bookkeeping firm that does the books for many known investors and teaches others how to do their own books properly. You might want to take some notes for this one.

Listen to the podcast here:

Bookkeeping Essentials For Note Investors With Debbie Mullins

Our special guest is Debbie Mullins. Chris and Debbie, how are you guys doing?

I’m good. Thank you for having me.

My brain is fried. That’s how my day has been.

Full disclosure, Chris and I did a podcast recording. Debbie, you’re going to have to carry us on this one.

What I had to do is I had to do multiplication flashcards with my son in between because we have a goal of knowing the multiplication table up to twelve by Christmas. That’s what I did in between. I played dad. We have Debbie Mullins, who has a bookkeeping firm, who does a lot of the books for many known investors and also does some consulting to teach known investors if they don’t hire services how to do the books properly. This is probably one of the most critical aspects of the business that people need. For me, I should focus and spend more time on it. Debbie needs no introduction. Debbie, it is all yours.

Hello, everyone. One of my slides should have said, “What is the most important part of your note investing company?” Chris jumped on that. Bookkeeping is critical. It is the most important part because you’re running a business. Your books are running a business. I will be talking about bookkeeping in itself but it’s more on how do you run a business because it is related. It’s almost one and the same. Everything you do in your business affects your bookkeeping. When I talk, I usually am referencing an LLC type structure because it’s what most people have but know that what I say could vary a little bit depending on what type of entity you have.

With that in mind, I find that when I start working with people, they think of their LLC as profit or income. How does that work on their taxes? Everyone says, “It’s a pass-through entity.” If you look at your tax return for a business, there’s going to be a Schedule C in there. Schedule C is the profit or loss of your business. Whatever that bottom dollar ends up being on your Schedule C, it rolls on to your personal taxes and that’s what you get taxed on. Sometimes people don’t quite understand how those two connect. Sometimes they tend to lessen the importance of their LLC as a business because it’s a pass-through and it’s like my personal money, but it’s not. It is a business and you want to run it like a business and not like it’s your personal fund.

To add to that, everything in your business should keep separate from your personal. It should be a separate bank account. Everything should be separate.

Nothing should co-mingle at all. It’s not between LLCs, not between personal funds. They’re all separate entities. You have to be careful that you don’t open too many LLC or too many entities.

I have two more that you need to add to the books.

I have to say I don’t think I know the third one.

Not yet. Jamie and I are working on that one behind the scenes.

You can have many LLCs but remember why you have them. That’s the biggest thing because people open them and then they can’t even keep track of them and they’re like, “I don’t remember the purpose of this one was.” Don’t complicate your world too much along the way. With that, I know that there’s a lot of advice to open an LLC, and one LLC could own the other LLC. The second LLC could pay the first LLC and management fee and they do a lot of that. I know that you guys talk a lot about asset protection. Not to downplay the importance of that at all, but don’t overcomplicate it if you don’t need to have that. Don’t get scared of asset protection. I work with a lot of investors who have 50 houses in one LLC, but I see people freak out when they have three. If you’re running your business properly, chances are you’re not going to be in a lawsuit. If you are, you have insurance or you have a good attorney. Most of my investors who get sued win their cases. Don’t open too many LLCs.

I’ve seen people who have an LLC for every note and I’m like, “You have to be nuts.” I do have an LLC owned by an LLC. The only reason I do that is because I have a podcast and I do a lot of things with my company, Seveney Investments. Seveney Investments does not buy notes.

It can work for sure.

It can work but there should be a reason.

I have people who say, “We set it up that way and I don’t remember why.” They’re trying to generate income over here so they can pay a management fee to that LLC, but there’s no income over here to pay the LLC. They struggle with it. When you need it, great. There’s nothing wrong with it but don’t overcomplicate your life.

I saw a post online where somebody had two rental properties and they spoke to one of these companies that help you set up on a website, BiggerPockets. They told the people that they needed to set up an S Corp for LLCs to a personal trust and they would do all of it for $14,000. This person had two rentals that cashflow combined $500 a month. I saw that and I’m like, “Oh my God.”

That’s exactly what I’m talking about and that’s why I want to mention it because I hear it a lot of time in these groups. Most people are learning how to run one and try to keep their books. These structures get crazy. It all centers around hiding and protecting assets. Until you have a ton of money and a ton of assets, you’re probably okay for a while.

Bookkeeping is one of the most important aspects of a note investing business. Click To Tweet

To quickly piggyback on this, Chris and I talked about this on the podcast. This is also another reason people don’t get started in investing, whether it’s notes or real estate or anything. They get stressed out about how this is going to be structured and how they’re going to structure their business but it can change. You can tweak it and you don’t have to have it all figured out before you take the first step.

It can be overwhelming. Start with the basics. I do see people who think of it as their personal transactions. Remember, you are running a business. What you’re going to hear me say a lot is, “Would Home Depot do it that way?” As we go through this, you’re going to see some examples of that. Home Depot runs a business so you have to run a business. A lot of times when people call me, they’ll start asking about services and they’re always like, “I don’t know when I should start with a bookkeeper,” and that’s a question. Here are our five options. When you open your business checking account, when you paid for your first class to learn about investing, once you buy your first asset, once you apply for your LLC or set it up, or once you own five or more assets. When do you need a bookkeeper?

I’m going to let Jamie answer that because I’m afraid to answer. We’ve got a B and we’ve got an E. My daughter went for her learner’s permit and I told her, “If you don’t know, guess C.” That’s always her joke. I said the same thing with the SATs. We got an A, B and two E’s. I would have said A as well. Jamie?

I’ll say C.

When you decide to be a note investor and then you are starting to run your company and your books need to start from day one, that would either be maybe the day you’re applying for your LLC and opening your checking account all at the same time, a little bit of crossover there. It would not be B necessarily because you start paying for things. Sometimes you’re learning before you decide to jump in. You wouldn’t have to start bookkeeping at that point because you may never decide to jump in. Once you have your LLC and you’re like, “I’m going to set up my LLC or my sole proprietorship, open my business account and I’m ready to go,” then you need a bookkeeper. However, it doesn’t mean you have to hire one. You can be your own bookkeeper.

Some people were thinking on E, “When should I hire one?” You can hire one whenever you get tired of trying to figure out QuickBooks, which for me was two days after A.

That was a little tricky because it wasn’t a hire exactly. It was, “When do you need a bookkeeper? When do you need to have books? When do you need to have QuickBooks? When do you need to have a formal set of profit and loss and a balance sheet?” That’s from day one. If you didn’t, you can always backtrack. That’s okay. I’m a big QuickBooks desktop person. I don’t use QuickBooks online for many reasons. It’s cumbersome to use. The desktop version is quick, easy, intuitive but mostly, it’s a lot cheaper to do that. You’re paying monthly forever or you can spend $300 and it will last you 5 or 10 years. It could last even longer depending on your CPA and if you’re trying to transfer file.

It lasts until your bookkeeper upgrades to the latest version of QuickBooks.

It can also be the CPA. I never upgrade unless I am forced to because of having to share with the CPA. That’s my thing on QuickBooks. I can help you with QuickBooks Online, but I do not work with it. I have everything on the desktop version. When you set up your QuickBooks in your company, one in the same thing, I’m running a company and I have to set up my book. It’s always bank accounts. You don’t want too many and you don’t want enough. You need a main checking account. A savings account is an option if you like that, but I always suggest you have a company savings account. If you get into rentals, you need a separate account for a security deposit. Every company should have a company credit card. There are a lot of benefits to having a credit card. If you don’t in the beginning, no big deal. I’m saying that eventually there are some benefits.

I finally got one, Debbie.

Business credit card?

Yes.

I’ll tell you the number one awesome reason that you use a credit card is everyone you pay with a credit card, you do not have to send 1099 to in January. Pay off your credit card, it’s easy. Come January, it makes your life even easier because you don’t have to do 1099 on anything paid on a credit card. I see people who set up way too many bank accounts and then all they’re doing is moving money around all the time.

The reason I see that is there are some people out there who teach classes that say if you set up with three different banks and transfer money from one to the other, it will get you credit faster. I don’t believe that. Credit is more based on building a relationship with that bank and keeping things status quo and having good credit and paying your bills on time. They come up with this flowchart that is like, “Set up these three banks and transfer $10,000 a month from one to the other and keep circling it around,” which drives you nuts. At the end of the day, who knows? You won’t know the difference whether you get the credit or not and whether it did help or not. Sometimes people overcomplicate things. One thing you’ll see some gurus teaching you is, “You have to move out and shuffle this money around.” I’d do more research on it.

Your credit does increase the more you’re using it. You’re not overdrawing your accounts. You’re paying your credit cards. It does naturally grow, and those things are out there so people could get to where they can get massive amounts of money or maybe large investors and things like that.

It sounds like for bank accounts, minimum, you need a checking. Savings are recommended. Credit cards are always good to have and then a security deposit is the least required optional type thing.

It’s almost a little different. A savings account is optional. If you have rentals, you have to have a separate account for security deposit. I’m in Texas but I would think it’s pretty standard that it’s not your money. You should be holding it on their behalf. I would have to assume that in most states, you need a trust account. It’s a separate account where you hold security deposits. Set up your bank accounts.

We get into bookkeeping and this is what a check looks like in QuickBooks. If you haven’t opened QuickBooks, if you haven’t seen it in other similar programs, it’s pretty intuitive if you see a check that looks like this. You know how to fill it out. You put in the date. You put in who are you paying, the amount, the memo. When I say a check in QuickBooks, it’s any payment, wired, electronic funds. Everything is called a check. Everything coming in is a deposit, regardless of how it comes in. Would Home Depot pay their vendor via PayPal? Probably not. Would they use Venmo to pay a vendor? Probably not.

There’s a new one called the Cash App as well.

GDNI 133 | Bookkeeping For Note Investors

Bookkeeping For Note Investors: When you decide to be a note investor, your books need to start from day one.

 

I’ve heard of that. You are running a business, which means you should have business to business transactions.

Paying a guy $200 on Craigslist to trash out of property via PayPal is something you should not do.

You should not do it. However, I do know in this business that sometimes you got somebody where you’re going to pay him $25 to drive by a house. There are certainly those times that you’re going to use those types of things. Because they’re not a business, you have no other way to pay them. When I say things, there’s always an exception. You can always do whatever you like or whatever the situation is.

Like the Tax Code, this is what you should do but there’s always an exception.

Running a business is business to business. I was an accounting manager at an aviation insurance company. Would I have ever paid back somebody’s insurance premium in PayPal or Venmo? I always write a company check.

Debbie, you’re telling me that when Chris sent me a PayPal invoice for DataTree, I don’t have to pay him?

I don’t remember seeing that on his books.

We can take that offline.

Chris went through a lot of time and effort with banks trying to figure out how to do ACH transfers, which is bank to bank, business to business. How fun was that for you, Chris?

That sucked. ACH is awesome by the way. PNC, through their Pinnacle program, is $40 a month but it also includes same-day ACH. If you’re buying an asset and wiring funds at $30 a wire, I could do same-day ACH on three purchases. It ends up saving me money in the long run. I wanted to go to the ACH route and get everyone lined up, get the W-9s. It’s in there because it’s in the bill, you pay it to Wells Fargo. If you put in a check for the same person, it’s $100 for a demand letter. I have to pay three of them. You can’t put three invoices with the same amount for the same day. You have to stagger them or you put it in, and one might get bounced back. It was painful. ACH is the way to go.

This is a P&L in QuickBooks. When I import, this is exactly what it shows on your bank statement. It’ll say this check. These are business to business transactions. With Venmo, sometimes it’ll have a name but sometimes it doesn’t. With PayPal, the same thing. It’ll say, “Paid via PayPal.” You paid PayPal. You didn’t pay a person. Your books need a history of what happened. Let’s say you are audited and you’d be able to look at that and see exactly who you paid and what for. With that one, you’d say, “Now I have to go look at my PayPal statement to figure out what happened.” That’s your clue. There’s a third party in between there. You want everything to be paid directly to whomever it’s paid to. That’s a hard one for people to get. You want to do it fast. That’s why said, “I got to pay them fast.” There’s no fast in business. You want to do it right.

Debbie, a question on that. A credit card isn’t the same thing then? Isn’t a credit card a third party that would appear as that credit card name?

A credit card comes through like what we were looking there. The credit card has a line item exactly like this. It shows exactly who’s paid. It is different. Here’s one of the differences. We don’t have to send 1099 to anyone that paid with a credit card because the credit card companies report that. That’s the other thing. If you’re paying PayPal, now you’re not paying John Smith Plumbing. It gets a little messy when you’re trying to send your 1099. Credit cards are still good and they help build your credit.

When we are entering a check in QuickBooks, we have the date, the name, the amount. At the bottom where it says Account, that would be like we’re coding it to the telephone expense or we’re coding it to an asset. For anyone who read the last show, you’ll know the answer to this. For everyone else, what is the most important field that we fill out on a check, date, name, amount, memo, the account? All are important but the most important field is the name, pay to the order of. You have to have a W-9 for everyone you pay, all of your vendors. You cannot fill out this check if you do not have a W-9 to know how to fill it out. W-9 and 1099, we’re going to talk about those.

Here’s my W-9. The first line is, “What is the name on the tax return?” What’s my business name? Who do you pay? You pay the group. That’s who you’re paying every time. What I’ll see in people’s books is that they pay John Smith, on the next line, they pay Smith Plumbing. They pay John Smith and then Smith Plumbing when it’s the same person because they’re going fast. They’re sending some money to somebody here or somebody there. You have to know who you’re paying. You have to know their legal name. You have to do it to that name every time because you’re going to report to the IRS who you paid. If you paid John Smith but it was Smith Plumbing, you can’t have a check that says, “I paid John Smith,” and then say that you paid Smith Plumbing. If you’re audited, it would look, “John Smith is trying to hide his personal money over here.”

One thing I want to add is some people buy notes or invest with their IRA. I put this in a 72 font when I send this to people because all the people, when they invest with their IRA, they’re like, “I know I shouldn’t get reported because it’s an IRA.” Sometimes they’ll put on this form, their personal information and their social. What I tell people is that is the worst thing you can do. You, Debbie, or my accountant, they don’t know who this individual is and they’re going to see a W-9 that says, “Here’s this person’s information on social.” All of a sudden, they’re going to 1099 when it doesn’t have the Quest IRA or NuView IRA on it. Also, if you’re getting paid, it’s who on your end is getting that money. Your IRA is different than you. I want to throw it out there.

Let’s say you’re doing a JV partner and you’re transferring money between the two of you for different reasons to buy assets and it’s not even a vendor situation, you should still have a W-9 from anyone that you work with. If someone will not give you a W-9, you should not work with them. There is nothing secret about any of this information on here. It would show you’re a legitimate company. There’s so much fraud out there. Who would not give you a W-9?

I know one investor who’s like, “Somebody asked me for a W-9.” I’m like, “You should give it to them.” “I don’t want to pay taxes on it.” “That’s not your choice.”

You have to get the W-9 before you pay them because otherwise, you’ll never get it.

A balance sheet is named that because it should balance your assets, liabilities and owner equity. Every part of it should reconcile. Click To Tweet

In my corporate world, I cannot get a check cut through the accounting department until they have a W-9 and ACH information from a vendor. It’s normal in every corporate world. Don’t feel sorry or be afraid to ask somebody for a W-9. It’s common. Most people realize that until you give that. A lot of times, people aren’t getting paid until that information is provided. It’s not like it’s uncommon. It’s not like you’re asking for something secret. It is required.

I’ve had times where the company will say, “You don’t need it, but here it is.”

That’s okay.

There is a common misconception about the $600 thing. I don’t know if you were going to touch on that. The 1099 doesn’t go out unless it’s over $600 for that calendar year, but you still need a W-9. Is that correct?

Yes. Here’s what you can tell people. If you’re using QuickBooks, here’s your vendor and you’ve got to put in this information. You have to put in tax ID number. This is where you put that information in because your system is going to generate 1099 for you. If you don’t have their W-9, then you can’t enter them in your system and then that means you can’t pay them. That’s why I tell people, “I need to put you in my system so I can pay you. I need your W-9 to get that done.”

The other thing is people would forward me an email and somebody will send them this information, “Here’s my name. Here’s my company name and my AIN number.” They email it to them and I’m like, “That doesn’t work either. John Smith, I’ll believe that’s your name.” At least with this. You have to sign it or they have to sign it and date it. The other reason you have to have them is for compliance for your business. If you’re audited, you have to prove that you are working with legitimate vendors. You’re not writing checks to some fake company name that’s you. You’re trying to make more money on the side and record an expense in your company that didn’t happen.

Jamie, you’re busted.

Money laundering.

I’ve got a couple of weeks to clean it up.

If you try to go back and get it from them when you’ve already paid them, forget it. You’re like, “I’m not sending that to you.” This is your proof. If you’re audited, that you have legitimate companies. Even if they lie, they have signed it and dated it. They are being fraudulent and not you. You have to have W-9.

I have another question for you because you mentioned don’t accept payments and stuff from PayPal for investors either. Is there a type of service that you recommend? Don’t pay people through PayPal and so forth. Is there something besides writing someone a check where they can easily get money back and forth?

Like Zelle or something.

There would be a wire, but that’s a lot of money with your bank, $15, $30. ACH is awesome, bank to bank, business to business. Most people don’t want to write a physical check. In the business world, there’s still business checks flying everywhere. Have you heard of the Deluxe? I used to order checks from Deluxe online. They offer an online check. One of my clients sent me a check that way and it was awesome. Go to Deluxe.com. I don’t know how much it is per check, but it was minimal like $0.50. It came to me in an email and it looked like a check that I could print out on my computer and take to the bank or I could snap a picture of it and use my mobile deposit. It is like a business check. It has the business name on it that it came from. I like that, Deluxe checks. It’s not Deluxe ordering checks, which you can still do that but online checks that you can email to somebody. That’s the easiest way to write a check without ordering them or doing wires. There’s no third-party thing out there that I would recommend.

I hear this all the time, “You don’t need a W-9 because you don’t have to send me a 1099.” That’s the hardest thing to overcome for people. They are not the same thing but W-9 is required. You need to work with legitimate vendors. If you pay that vendor more than $600 a year and if they’re a certain type of entity, then you’re going to send them a 1099 at the end of the year and they weren’t paid with a credit card. If they’re a C Corporation, if they’re an S Corporation, they are not going to get a 1099. How would you know if you don’t have their W-9? Come January you’re like, “Who do I send the 1099 to?” If you don’t have a W-9, there’s no way you know if they need one or not or how much money they owe you.

You changed from an LLC to an S Corp, I’m guessing you’d have to send new W-9s. I’m asking for a friend.

That’s your entity. Every entity has to send 1099.

Let’s say someone is like, “I need a W-9 because I’m sending you money.” I’m like a servicer.

They need to send you a new W-9. If they’ve changed their entity, they should be sending out new W-9.

My friend should send them a new W-9.

GDNI 133 | Bookkeeping For Note Investors

Bookkeeping For Note Investors: You want everything to be paid directly to whomever it’s paid to.

 

By the end of the year, if you’re an escort, then I wouldn’t worry about it. Usually, if you change mid-year, they allow you to backdate that, right?

Yes.

If you’re going to change entity, you would backdate it to the beginning of the year. The whole year, would you have been an S Corporation anyway?

It makes sense. I would think it’s how you’re going to file for that year.

If they change as long as they send you a new W-9 and you know. I had a client that hadn’t looked at the books and the books were a mess. I was taking it over at the first of the year to do 2019, so there’s no data in there and there are no names in there. We’re trying to put this together. There’s no way when you start on somebody’s books in January or February, that you’re going to issue 1099 in January. We’re having an issue trying to get everything caught up. They were antsy about wanting to send their 1099. I said, “I’m not going to send them if I know it’s not correct yet.” If we’re starting too late, I’m not going to send those.

I could send them if they wanted to, but they sent me a list of everyone that they were sending them to. There were probably 14 or 15 on the list, and at least five of them should not have gotten 1099. You want to know by January who needs to get one and who doesn’t. Partnerships get one. IRAs, there are certain ones that do or don’t. Of course, IRS.gov, there are always instructions on how to do 1099 that can tell but if you don’t have a W-9, you don’t know. We use the W-9 so that we can determine if we need to send 1099, but they are not one and the same.

The way I look at W-9 is it’s the initial step you need to put somebody in QuickBooks. Someone says, “I’ve got to put you in my system. I need a W-9.”

When you get these, you need to be able to look at them and see if they’re correct because if they put in a Social Security number and EIN number, then the person doesn’t know what they’re doing. I’ve seen that all the time. They should know how they want you to report to them. Sometimes they don’t mark anything in box number three because they don’t know what to mark.

Debbie, I’m asking for a friend, is it a bad sign if your former bookkeeper fills out their W-9 incorrectly?

I’ve seen stranger things. I can tell you that two of my clients have emailed me. They got letters from the IRS saying, “Something is wrong with your 1099 that you filed. The number didn’t match. The name didn’t match.” We did it correctly. We have the information out there, but the person didn’t fill it out correctly. They’re important and they guide you. They tell you everything you need and they keep you in compliance. Anything else on that subject that I talked about a bazillion times a year?

This one’s going to be the topic that is going to spend a good amount of time talking about.

Deposits, splits, and servicers. This is what sets you apart from bookkeeping. With this, we’re going to talk about the profit and loss statement. For people just getting started, you won’t even know what these reports are. The profit and loss have income at the top and expenses at the bottom. The bottom-dollar is your net income. Those are good for service companies, even like me doing bookkeeping. I have my income. I have some computer expenses. The bottom-dollar is how much I make, my net income.

Investors end up using the balance sheet a lot. The balance sheet is a more complicated report. It’s a little bit of a higher-level report. It has all of your assets at the top, everything you own, and your bank accounts. The bottom is all of your liabilities, credit cards you owe, JV partners, and anything like that. It has your equity as well like your owner contribution and your owner draws. Because you work with a lot of assets, you’re balance sheet heavy.

A balance sheet is named that because it should balance assets, liabilities plus your owner equity.

All of your books should balance. Every part of it should balance or reconcile. You hear that name a lot, too. The general rule is that your balance sheet is correct, your profit and loss report should be correct. I always try to start with a balance sheet when I’m reviewing it or working on it and then move over to the profit and loss. Because you have a lot of assets, you hopefully are getting deposits from servicers or when you’re even selling assets.

Madison, for example. They give you a deposit and it’s for four different houses. It’s principal, interest, servicing fees, advances, which maybe you’ve paid for the taxes and now the borrower is paying you back for the taxes. You could get a report from Madison that is fifteen lines long. In QuickBooks, you’re going to have fifteen lines to match it. You have to break out those reports in the books exactly like the report is. You’re going to code some of it to the principal of the asset, interest income, and servicing fees. When you get money back on your repairs or your taxes, those are going to be some holding costs. There’s a lot of breakouts that you do.

If you’re getting a check for $500, you don’t put Madison $500. One of the things that I’ll throw in here is because people who do JV deals, how is your deal structured? Some people will give a 50/50 split, but what are you splitting? Are you splitting the profit, which is the interest? Are you splitting the payment? People will call me up and I’ll say, “What’s your agreement saying?” They’re like, “It’s 50/50 split.” I’m like, “Of what?” The principal, as it comes back, should still remain there for expenses and you should only be splitting profit at the point in time. It’s how you structure that deal with the investor, which is extremely important. That’s one correlation where a lot of people missed the boat. Your books are closely tied to the contracts that you have with other individuals.

A little bit below, I have a little thing that does say investors because a lot of times, too, when people start out that agreement as Chris was talking about, the way it was set up doesn’t match the books. They have a hard time putting into the books what they’ve agreed to do with the JV partner. In one scenario, we have a deposit at the bottom of $325, $100 principal, and $200 interest income, so you made $200. In advances, you already paid $1,000 for taxes and now you just got $50 back, so you’re getting reimbursed. In servicing fee, this is a cost. There’s a negative because you didn’t get the $25. You had $350 but they kept $25 of it, so a lot of people miss that.

Like Chris was saying, sometimes there’s a deposit of $325 and people think I made $325. The only thing you made was $200 minus the $25. In both of these, you’re getting your principal back and you’re getting reimbursed for some expenses. Let’s say the Madison statement has four lines on it and now we have four lines. If you agree to split your income with a JV partner 50/50, now you each get $100 because the interest income is going to go on your profit and loss. That’s the money you made. Another interest income, you’re going to give to your JV partner. Now you’ve only made $100 and not $200. Even though Madison has 4 lines on the report, now we have 5.

Just because a CPA might do it doesn't mean it's right or wrong. Click To Tweet

I know sometimes this can go deep, but it’s important to understand. Unlike rentals where it’s like, “I got $100 a month in rent.” Here, it’s much more detailed. Where it also goes on your balance sheet is a whole other animal because your interest goes as a liability and principal is an asset and vice versa. A question came through. Is typing in a memo allowed to show up in categories? If you have an asset, there’s a class in QuickBooks, which is all the way to the right. That class is typically the asset, but also within the class, there’s 123 Main Street, which is holding cost. 123 Main Street might have three different classes, correct?

Yes. What I had done on that deposit was I did not fill in where we code it. That person was clever that they’ve noticed that we weren’t assigning those dollars to any particular account. Right then, I wanted you to realize that the reason why you’re doing bookkeeping is because you can’t do all of that on the spreadsheet. That’s why you need your books to track all of those slips. We’ll talk a little bit about those accounts. I wrote a check to Madison for non-performing notes, so I owe them servicing fees and it’s $25 for each note. I wrote it for $50, but I could split this, so you can record it by property.

For example, I have 100 assets with force-placed insurance. I don’t send 100 different checks to the insurer, JB Lloyd. I’ll send them a check for $2,500, then I’ll take the invoice. I’ll have that in an Excel spreadsheet and send it to Debbie. It will then take those 100 assets, and then put them under this amount. It might be $2,500, but then there’ll be 100 line items under this one account with the class and the amount for each one. You don’t have to break it. You don’t have to pay each individual asset to that vendor. You just need to make sure that your bookkeeper understands how that $50 or $1,000 is segregated into which asset. I hope that makes sense for people.

I’ve seen Madison invoices that are 8 or 9 pages long. This is 50 lines because there are 50 different assets that are all charged $20 or $15 and we have to break it out for every single asset.

The Orion ones for $0.10, how are those Debbie?

Thank goodness, Chris. Let’s put those on the P&L now. There could be hundreds of lines and there is a limit on QuickBooks. I’ve not put a lot in a check before, but there is a point once where it stopped on me, so I had to rethink that.

It touches on a point that wasn’t apparent to me at first. As note investors, non-performing assets require more work typically. From bookkeeping and from a servicing standpoint, in a lot of cases, the performers are much more work. It’s an interesting dynamic there.

For your day-to-day, it’s completely the opposite of your bookkeeping. The more transactions that happen in the book that hits the bank account, the more breakouts probably that you’re having to do. Even when we had that deposit and we were talking about the interest, there’s interest income you can code things, too. If you have an interest expense, you pay interest on your credit card or something. These are all called the accounts. There are all kinds of rental properties. Rentals get broken out in a bunch of different ways. This is your chart of accounts. You’ll probably hear that as well. When you first set up your QuickBooks, your chart of accounts is specialized by industry. A service industry uses a different chart of accounts than an investor uses.

Another reason why to use a bookkeeper is after you foreclose and you take a property back, it moves into different accounts on your balance sheet and it’s treated differently. It can depreciate. It has many different things, which for me, I don’t know what they are. That’s why I tell Debbie, “We foreclose on this one on this date.” You and the tax person figure it out.

These are only a few. There can be a lot of other categories, but when you own an asset for a rental, it’s split out by building, improvements, and land. If you have a note, then it’s usually just two lines for each address, the assets that you own, and then some holding costs.

Holding costs are typically your force-placed insurance, servicing, legal advances, BPO order, title report, and all those things. It’s your expenses that you’ve had go into the holding cost.

To take it one higher level, we do put those costs. Anything that happens on the note, we put in that holding cost on the balance sheet, so that’s a big thing. People think it’s an expense. I paid that insurance and I paid that servicing fee, but it’s not necessarily an expense that goes on the profit and loss statement. I have some income and I have my expenses. My holding cost has a fixed asset, so it’s increasing the value of your assets.

You’re collectively gathering all of that cost in one place and that’s important, especially if you have a JV partner because you want to see everything together, the total cost. Down the road, things can change. If you are making a lot of interest income and you own the note and there are no JV partners, you can start capturing some of those expenses on the profit and loss to offset that income. That’s when you’re starting to get to a higher level.

After a few months or before the end of the year, you’re analyzing your books to see what you should or can do with those expenses. If you’re making a lot of money, then we can capture some of those expenses on the P&L. I had somebody who had 100 notes and they’re all non-performing. He’s paying servicing fees. If we put those as expenses, he would have a $100,000 loss on the books and you just can’t do that. They have to be on the holding cost. They have to be costs that are accumulating because every year, you can’t have a $100,000 loss on your books. You can if you have a good CPA.

That’s important for people to realize that you’re holding this asset. The only thing that typically goes on to your P&L is any interest that’s earned. You may have more expenses on the asset and money that you’ve made, but on your taxes, you may show income because it’s all in that holding category until you liquidate that asset. I know that’s difficult to think about. If you spent $10,000 for an asset, and then you spent $5,000 on foreclosure, they made one payment say $300 in interest on your L&L, it’s going to show that $300 even though you’re out $5,000. It’s baking in your balance sheet for the time being until you liquidate that asset. You don’t get to write that off that year.

Some of this might sound overwhelming also, but that’s the nice thing about your books. If you start your books, you learn a little bit each time. Once you do that, then you’re like, “Now I have a good example of how I would do the next one.” You have to start at the ground and start learning. I did pull up a P&L, profit and loss as Chris was talking about as an example. This is some interest income and you can see little sub-accounts by property. You can see each month, we’re getting a little bit of interest income. It’s not bad. We like that.

We get a little bit of a late fee income, too, because our borrowers clearly pay late all the time. The total income is $4,308 and now you have all the expenses. I will have people who think they can now take an owner draw like, “I’m going to take $4,000.” It doesn’t work that way. They have all these expenses to run your company. Collateral, all of these bells and whistles, and all the online services that you use. You have some interest expenses that you’re paying to a JV partner. Postage and you had to buy some checks. I do want to note this awesome bookkeeper.

Why are they getting such a deal?

Chris thinks you’re getting a deal because he has to pay a whole lot more. I would point out a million dollars, so I might have to change that. We paid our CPA, had our telephone expenses, and then we did a little training class. Now we’re losing money. We have lost over $1,200. There’s no money here. You cannot take an owner draw and you cannot take money out of a company that has a loss. We’re going to look at the balance sheet next.

GDNI 133 | Bookkeeping For Note Investors

Bookkeeping For Note Investors: As a general rule, if your balance sheet is correct, your profit and loss report should be correct.

 

That’s a big thing. People put money in, and then they do an owner contribution, and then think they’re doing an owner draw. An owner draw is taking money from the profit of your company, not salary. On your Schedule C, this is what’s going to get reported, not the draws because I had some somebody say, “I took $30,000 out in draw.” That’s what they’re thinking is going to get reported as their salary from their company.

Here’s one thing I want to mention because you mentioned that. If you make $50,000 and you didn’t take any money and you reinvested at all, you’ve still got to pay taxes on that $50,000, so you better make sure you still have cash that you got to pay Uncle Sam. If you’re in a 28% tax bracket, you got $14,000 that you’re going to have to pay, and then you may have Social Security, Medicare, and all this other stuff as an LLC, as a pass-through. Don’t think that when you make money, you can just reinvest it and it hides that you don’t pay taxes on it until you take it out. That’s not the case.

There’s nothing on this profit and loss as an owner draw or an owner contribution. You’re paying. This is rolling on to personal taxes how much your company made.

Another thing, Debbie, to add to that is instead of doing an owner contribution, you could do a personal loan to your LLC, and then make payments back out of your LLC. I don’t want to get too complicated, but that is a way to get money back out legally.

On the owner draw and owner contribution section, we saw that the P&L has no profit. We’re at a negative $1,200, but somebody might have taken $5,000 out twice, so they took $10,000 out. We cannot leave it here as an owner draw. We have to code it as due from the shareholder because they took money that wasn’t there to take. Now the shareholder owes that back to the company. Sometimes, if you put in an owner contribution, it can be a contribution to the company and that money gets used up. It can also be put in as a loan from the shareholder, so you have to think about that. It could be adjusted down the way but know that anytime you do a loan, the IRS expects 3% interest to be paid. Even if you put the money in, that’s going to be the differentiator whether it’s a contribution or loan.

Never do a loan in 0% for anything because the IRS will tax you at 3%. Even if it’s 0% interest, they will still tax you.

That’s why we happen. The assets are at the top, so your bank accounts are your assets because however much money is sitting in the bank is an asset for you. Here’s a big one. This was an education class for $1,000 and we haven’t coded as due from shareholder. You paid for a training class and some of them are a lot more than those. I’ve seen $6,000 to $20,000.

Up to $75,000 is what I’ve seen.

I’m in the wrong business.

Jamie has a question for you. The question was, what are the benefits of loaning to your entity as opposed to just making a capital contribution?

I have some loans personally to my business and I get monthly cashflow back out from my business. That’s not considered an owner draw. If you’re not showing a big profit, but you still want some cashflow back to your personal side, that’s one way to do it. The interest on that loan is an expense for your business.

It’s personal income as well that you should report.

That might be a 1099 thing. Schedule C is called profit or loss from your business. Your CPA has to fill this out. He’s going to take the numbers from your books and he’s going to drop them into this. In advertising, you pay commission or acquisition funds to somebody sometimes. If you have office supplies, you might have a rental space where you lease. If you’ll notice, nowhere does it say training and education. There is no such thing as training or education for an investing business.

When you’re doing those classes and you’re learning and trying to decide if you want to be an investor, that’s self-help. Technically, they’re not deductible. That always freaks people out, but it’s not like you can’t take them. If you go to a networking meeting or a meetup group and you have a meal, it’s not training. You just code it as meals in restaurants. You buy a book to read, that’s not office supplies and it’s not training. There are ways to capture those things.

How about memberships?

Sometimes we’ll do it as an online service because it’s something online. A membership is, “I joined the Better Business Bureau or I joined my chamber of commerce.” There are all kinds of those online services that you join, so we put those as computer and online expenses.

I joined the United States Foreclosure Network, which is a networking group but it’s not educational. It’s more of the membership for networking and things like that.

Back in the day, everything was in person. Now all of those things are online. It was truly a membership because you went someplace and you were part of a group and a member. We hide or code those things as online services now.

I’m upset that you did not let me deduct my massage chair, which is my therapy chair. You and my CPA told me no.

If you have a headache, you don't want to see a foot doctor. In the same way, you want a CPA who owns real estate for your note business. Click To Tweet

Did I see that in your books?

You told me I couldn’t put it on.

I have seen some interesting things. I’ll see speeding tickets sometimes. I got a speeding ticket going to a rental property and I’m like, “No, it’s not. It shouldn’t be on here.” Don’t pay for those things out of your books. Think of it this way. If you have to show your books to somebody, what do you want them to see on it?

Legitimate office expenses, phone, computer, and printer. If you use it for your office, it’s legitimate. Some people may have a TV that is for the office that they use as a monitor or something. That’ll be used solely for that purpose.

Scott is saying, “Use your self-directed HSA.”

That was for the massage chair.

This is the thing with CPAs. Some will put this as an expense and take it as an expense, but some will code it as due from shareholder, especially if it’s a large amount. This one probably could be an expense and it would be just fine, but you cannot put $20,000 worth of training and education as an expense.

There was a guru who had a $15,000 training course who was pouting that, “It’s a business expense. You can write it off, so you don’t take my training because it will be a deduction on your business. You can write it off from your income.” You’ve got to be careful. Talk to your CPA. Don’t listen to gurus.

Some of them will leave it as a startup asset and they’ll depreciate some of it over a year as an expense. Just because a CPA might do it doesn’t mean it’s right or wrong. One will do it. One won’t.

I have a loan servicing software and it was a five-digit expense. I remember when it went in, we got Debbie and my CPA explained what it is. Is it an asset that we had to depreciate or a one-time expense and work that out? The stuff is you have the conversation with your group, and then determine how it functions. Somebody mentioned personal development coaches, if that would be a business expense.

Borderline.

I know business coaches and stuff like that, and so forth. Companies sometimes are like, “We’ll pay for people to have those.” Is that a borderline thing where you should run it by your CPA first?

The other thing is that you need to figure out if you have income in your business because it can’t have any income and have $20,000 worth of expenses that are things like this. There is certainly a development cost when you’re starting a business. That’s what that one CPA was doing. It’s a startup development cost. Keep in mind that if you don’t have income, then you need to think about your true company.

You probably need a better personal development coach then.

Debbie, what about expenses to renew licenses? Realtors say, “You have to take twenty hours of realtor training every year.”

Mine are direct. I’m a realtor as well here in Texas and I am required to take continuing education classes. All of those are deductible training and education. Doctors probably have certifications. If there are things that you have to have, then they’re required.

Like a note investor, if they wanted to be an MLO or you wanted to get a state license in the State of Georgia, for example, for your business that has costs and fees involved, that stuff is things that would be considered deductible.

You have to also say, “If I’m an investor and I want to have my real estate license because that’ll help me and help me buy properties and things like that,” they don’t crossover. They are two separate companies. You also have to determine, is that license that you’re getting is its own business, or is it an expense for an existing business? You have to watch that as well because I get 1099 from my broker. That’s a completely separate business to be an agent, then whether I’m an investor or doing bookkeeping.

A part of your balance sheet, you’re going to have all of your assets. You’re going to get that principal from Madison and you’re slowly going to get your money back. You’re going to have a bunch of holding costs along the way unless you don’t somehow and you’re one of the lucky ones. Those are the holding costs. If you had a credit card, it would be there. Your JV partners, when they give you money, they sit as a liability. You owe that money back. If you get an interest from Madison, it’s going to be put there, too, because you owe them that money back.

GDNI 133 | Bookkeeping For Note Investors

Bookkeeping For Note Investors: Nonperforming assets require more work than performing ones for note investors, but from a bookkeeping service standpoint, the reverse is true.

 

Debbie, one thing people should understand too is if you buy a note for $15,000 and have the JV partner give you $5,000 for holding costs, it doesn’t matter if they give you $20,000. Correct?

Yes. People will say, “They gave me $15,000 to buy the asset and $5,000 for the cost. How do I put that on my books?” That’s how you justified how much money they’re going to give you, but you own $20,000 regardless. In your books, you’re never taking that $5,000 and subtracting costs from it. Those two things are not going to be coded together on your books anywhere and people try to. They’re like, “How do I subtract those costs from that $5,000?” You don’t.

But you can collect a fee upfront from a JV partner.

Yes, for the cost.

Like an acquisition fee or something like that.

Some people do that too like $1,000 or $2,000 to cover it.

I strongly recommend you do and the way to explain it to people is you get deals where you pulled tide reports and you didn’t get the deal. All that lost opportunity costs, you got to recoup that some way. You’ve got marketing and overhead. That doesn’t get broken out into a JV deal. A JV deal is in its own little box, but you have all these costs that you’re going to have to figure out each year. How much are you going to spend? How many deals am I getting? What is the fee that I’m adding? It could be $500 or it could be $2,000. It depends on what it is. Make sure you stipulate that and put it in your agreement, that you’re charging that fee upfront. It’s not uncommon. I know people that don’t do it. It’s important to do because if you’ve got twenty notes that you’re going after and you don’t get ten of them, you may have dropped $3,000 or $4,000 on due diligence and you’ve got no way of recouping that.

I didn’t do that initially and I do it now.

You’re like, “I’m not making money. I need to recoup my costs.” That’s why we have Chris and Jamie. They’re going to teach you all of those learning from experience kinds of things but as you put it in the books, you’re like, “Now you can see how it affects the bottom dollar of your business.”

Books don’t lie.

We see that often. When you’re doing your books, at the end of the year, the whole purpose of having these awesome reports besides you watching and tracking your company is that you give them to your CPA and they do drop those numbers into your tax return. Like what Chris was saying, we asked the CPA about what he can take and what can’t take so it gives us an idea, but I’ll have people who want to ask the CPA a bookkeeping type question. I’ll ask my CPA how to code that. 99.9% of the time, I can tell you how to code that. They might want to do something different with it in the books, which is sometimes okay and sometimes not okay. This report is called the Balance Sheet with Detail and the other one was a Profit and Loss with Detail. CPAs will tell me when I’m going to send it for my clients, “Do not send me this list.” They want the P&L and what that means is all they see is the headings and the total amount. They do not want to see the details.

In the subcategories so they know what was office versus a Schedule C, correct?

Yes, all they see is collateral storage $70. Computer expenses, $2,100. They don’t want to see that detail because for one thing, they don’t do books, and it’s not their job to go through and make sure your books are correct either. They aren’t responsible for some of the things that you have in here as well. You want to make sure your books are correct and you want to learn those things along the way. Most CPAs I work with are awesome and they certainly know what you can take on your tax returns and what you can’t, but I have CPAs who tell people things that are completely incorrect. Sorry if we have a CPA on here, but I have a CPA telling a client who was commingling funds and we kept coding everything as due to this other company or due from this other company because they kept using one LLC to pay for other things. The CPA said, “That’s okay.” That is never ever okay. Chris is like, “What?” This has been going on for a few years.

Here’s the thing. You don’t do this when people get worried about commingling. There’s going to come to a point in time where you pay with the wrong entity or something like that happens and it’s a do to due from. You may use your personal account because you got a call that the taxes need to be paid today or it’s going to tax sale, and you’re out and about and don’t have your business credit card. There’s a point in time, “I have to pay with my personal,” but you mark and due to due from and you do it. You don’t do it every day, there’s going to be an occasion where I’ve got an entity that I thought was owned by entity A, but it was owned by entity B and I paid with the other entity. Debbie’s like, “Is this a new asset?” I’m like, “This is from this one.”

Debbie and I talked about this. My son logged into my wife’s Amazon account and bought something through Audible.com on one of our LLC accounts. There are more stories that are better than that. I’m not going to jail over that.

In your book, we can code it as, “I accidentally paid from the wrong company.” We code it as due from the other LLC. The other LLC writes a check to the first LLC and it gets cleared off your books. It’s coded correctly, and that stuff happens. What the CPA is saying is we haven’t coded correctly on her books, because we haven’t coded as due to or due from this other entity but it’s not accidental, intentionally using this LLC for two years now. What the CPA is saying is he’s getting the numbers off of LLC number one to record on the taxes for LLC number two, but it is not okay. Chris is squirming. He’s like, “What?”

With that, there are two things I want to say. One is, CPAs are like, I’ll say doctors. You want a CPA that does real estate. If you have a headache, you don’t want to see a doctor that specializes in feet. It’s the same thing with the CPA and a bookkeeper. I have to use two different CPAs because my wife works for an international organization and a real estate CPA can’t figure out how we have to do her taxes but at the same time that tax person can’t figure out how to do real estate so I have to use two, unfortunately. It’s the same thing with a bookkeeper.

There are bookkeepers and CPAs out there that will tell you, “If you do a loan modification and the balance UPB goes from $20,000 to $100,000. There’s a section in the IRS where you have to take that as shadow income from the year.” People get all flipped out because there’s a CPA out there that teaches this and says, “You’ve got to pay me and I’ll do your books the right way and not have you pay for the shadow income and stuff.” The reality of it is if you treat your note like it’s a business and do everything the same, you have income expenses, you’ll notice on the books, you do not see UPB, payoff, total payoff, or interest rate. You see none of that in your books. That’s important for people to understand and realize. Somebody posted in the group, “The UPB goes up.” No, you’re UBP on a loan, the loan information goes nowhere in your books. It’s your money that goes in your bank account and the money goes out of your bank account. If there’s one takeaway from everyone, that’s probably one of the many people also have to realize.

Exactly, because it’s fake money. Maybe you have a note for twenty and it’s worth 50 but there’s no guarantee that you’re going to get 50. It depends on what happens along the way.

Real estate freaks many bookkeepers out, but at the end of the day, it’s still assets and liabilities. Click To Tweet

Unless you’re buying from me, right, Jamie?

The other thing I’ve heard a CPA tell people is, “You don’t need a W-9 for that person unless you’re going to send a 1099.” I hear, “My CPA said I only need one if I’m going to send the 1099,” and it’s incorrect. Here’s why. They ask you, “Did you send 1099?” Because when they do your taxes, they have to mark the little box that says, “Did you send 1099?” They’re thinking of it on that side of it and not telling you how to run your business, your day-to-day operations.

Debbie, I was curious how you got involved with notes specifically. As you know there are some bookkeepers out there who are not familiar with notes, as I know well. It’s not your whole life history or anything.

It’s a few years now. I was interested in real estate investing, flip rentals, that type of thing so I was going to meetings, and I met a CPA who only did real estate investors. I was an accounting manager at the time and wanted to go out on my own. We happened to cross paths so he started sending some clients my way because he used to do their books, but it was so large that he didn’t want to do that side of it anymore.

I feel blessed. I feel like I learned from the best and his name was Keith Boyer. He since sold his practice and now invests so they buy hotels and all kinds of things. They have their hands and everything, but he had said he spent three years digging in to make sure he knew exactly how to code things for real estate investing. I got to learn from him on the real estate side. I already did the accounting, the expenses, and income, but I got to learn from him.

I started with flipping rental people and I met Adam Adams, which was a name out there in the notes. I connected with other notes investors through him and it grew from there. In general, if you know how to do bookkeeping, profit and loss, and a balance sheet, it does go across all entities. Real Estate freaks some people out but it’s still assets and liabilities. If you know how to treat them, it works but you have to know also what you’re talking about with the notes world. That’s how I got started.

One of the things that I advocate for people because as you start with a new note space, you’re trying to reduce as much cost as possible and who you hire for consultants and stuff. For me, a bookkeeper should almost be near the top of your list. The reason I say that is when you start buying notes, you go file your taxes. If your books aren’t correct, what a CPA charges versus what a bookkeeper charges, you could almost eat up what you have to pay your attorney to fix all the screw-ups in what you could have paid your bookkeeper in that year.

You basically did all that labor and work for free, which takes you away from doing what you’re good at, which is buying notes. If you’re good at buying notes, why do you want to spend time trying to figure out your books? It’s crazy. If you give it to an expert, they’re good at it, and they get it done. It’s like riding a bike. They know what it is and they code it. If you don’t know what you’re doing, you’re going to spend hours per month doing this and it’s going to be a time that you could spend doing things that are much more beneficial for your business. That’s my opinion. I’m curious about Jamie’s answer as well.

I wholeheartedly agree. My only regret is not switching over to Debbie earlier. I will say too, and this is not an infomercial, but I’ve mentioned this on another podcast episode, you did help me catch the fact that I didn’t have insurance on a rental property. Not a note but an actual rental property, because it had been canceled three times. It’s a long story. It’s my fault. I thought I had it.

There’s so much going on but when you put it in black and white in your books, you’re like, “I pay for insurance, and I got a credit so I don’t have insurance anymore.”

It can help you in ways that aren’t directly related to your books as well.

By keeping your books up to date, I can rattle off a dozen things like looking at your holding costs compared to the advances where your servicer because you paid a $3,000 tax bill and all sudden the servicer says, “Here’s the payoff.” It’s like, “Wait a second.” Anytime I get a payoff from the servicer, I go back and look at my QuickBooks to see if I have any major expenses that were not accounted for. All sudden they get a payoff, they refinance, and you forgot to include taxes. You can’t go back after the fact. Debbie, a question came through and any of us can answer, “Should a CPA know and be familiar with real estate, but also located in the state you’re located?”

Being familiar with real estate is helpful, yes. For the same state, it would depend on the CPAs because of their familiarity with how real estate might be handled in certain states. It might depend on their expertise if they’re comfortable with multi-state. I certainly have CPAs here in Dallas and even my clients have rentals in a few other states and they’re able to handle it fine.

My CPA and my whole team are down in Texas. The other one that does with my wife is in DC so I don’t have any in Virginia where I live. This poses the question, and Debbie, I’m not sure if we can answer this because it comes up a lot, I bought a note and made money in Ohio on that asset. Do I pay Ohio taxes or do I pay your state taxes?

I’ve seen their tax return. I asked my clients to also send me their tax returns at the end, but I want to look and see how they took our numbers and what they did with them. I will see those tax returns that have a Texas portion and a California portion. They do have to file certain forms in different states. CPAs are awesome and I don’t want to make anything sound like I wasn’t saying that, but they aren’t always looking at how you run your business in your day-to-day operations. They need to take your numbers and do the best with your numbers for you that they can do but they aren’t always thinking about your business being in compliance.

Most people still here said, “What questions do other people have?”

That last thing that I have on here. People always tell me later, when they read this, they freak out about that whole training thing. It doesn’t mean we can’t capture some of those expenses. I like people to think about it before they go spend $20,000.

Don’t bank on it, especially if you don’t have the income. Everyone, if we sent you to log into QuickBooks now and had you put in the acquisition of an asset and some payments coming indoor everyone would be right?

Yes. I’m sorry if you thought that we would learn how to code but I’m trying to show you that your books will line up with your business day-to-day for every transaction that will line up.

GDNI 133 | Bookkeeping For Note Investors

Bookkeeping For Note Investors: When you’re doing your books at the end of the year, the whole purpose of creating good reports is to get them to your CPA and have them drop those numbers into your tax return.

 

Everything is similar to owning a note. It depends. There’s not a one size cookie that fits everything. There are certain things that are always the same, but then there are late fees and how late fees are calculated. I’ll be upfront and tell you that servicers, certain ones are much better at recording payments to put into the books than others. I’m going to be either completely gray or bald come mid-January when I get my forms from Allied because it’s going to be a disaster. Madison, after I slapped them around for a good number of years ago, they learned and now put in their system report that I can pull them to match. That was because of the conversations that Debbie and I forced in their accounting department to sit on a phone call for a few hours to show that the numbers didn’t match.

Everything has to be reconciled. Everything is broken out. With Chris, let’s say we had ten assets, and we had everything broken out all year long for Madison. At the end of the year, it didn’t match their report. We’re like, “Five of them match and five didn’t. What happened along the year that wasn’t on the original report they sent us?”

That’s one thing in your books that people don’t realize. At the end of the year, you want to reconcile because they may have coded $2,000 of payment that went to interest where it should have went to principal. If you’re splitting the interest with your partner, you overpaid them $1,000. There’s a lot of things like that. They miscoded it to the wrong asset and you paid the wrong JV partner. You don’t think these happen. This happens a lot more than you think.

That’s why we say, “The books don’t lie,” right, Jamie?

That’s right. You’re also helping Madison because they got audited too. It’s a win-win. Debbie, you guys mentioned already that you are doing the training session still.

I help people in three ways. I can completely set up your QuickBooks shelf for you and do your initial data dump for you. Maybe you’ve been doing it all year, but you haven’t started QuickBooks yet. If you have some data, I can do that initial data dump and with that, I’ll spend an hour with you saying, “Here’s what I did. I set this up and now here’s where you take off and run with it.” For some of my clients, I do a quarterly or every six months, review. They do their own books, then we do basically a half-day session where we go through their reports, fix anything, recode anything that we need to do and I do monthly books for my clients as well.

For some people, you’re also getting started out and you bought a note. Technically, you can still do this in Excel. If you don’t have a lot of expenses, income, it’s probably not recommended but if you are, I’ll say cash strapped on things, you track your income expenses and stuff. It’s not recommended, but it’s something that I see people do as well.

Start with that desktop version. Don’t do it online. You can sign up for $20 or whatever, but it’s going to be $40 or $50 a month so you’re talking $600 a year versus a one-time $300 payment for QuickBooks Online or QuickBooks desktop and it’s an easier program than the online version.

Someone did ask them about the desktop QuickBooks, which version for business because there are different ones.

Most of the time, you can use QuickBooks Pro. There’s QuickBooks Premier, which has a lot of extra bells and whistles. You can look on their website and see those extra bells and whistles. Basic accounting is basic accounting so all of their versions can do the same thing. Look at the QuickBooks Pro. That’s probably where you want to be. I have what’s called an accountant’s version and you can even buy that. That doesn’t mean you have to be an accountant. It has a few more bells and whistles and things that you can do for a few more reporting. It still does basic accounting like the other program.

Let me ask this question, Debbie. If someone were to hire you to do their books for them, do you still recommend they have a version of QuickBooks?

I have clients who I tell, “I have a QuickBooks file on my computer but if you ever want a copy of it, I can send it to you.” Chris happens to be somebody who does get a copy of his QuickBooks. You can open it up and you can look at things, run reports, or do whatever. If you delete it or blow it up, it doesn’t matter because I have the original. We don’t share the file. I tell people that. They’re like, “That’s cool. I’ll get that and I’ll run reports every month.” They never open it and they never look at it. Yes, you don’t have to have it if I’m doing your books but if you have it and you want the file, it’s like sending you a Word file or an Excel file. It’s a file that you’ll be able to open as long as you have QuickBooks. If you want to play around with it, and run reports, you can have it. You don’t have to have it, but you can.

I like to have it because I can take a specific asset and run a P&L on that or a balance sheet. If you’re starting out a few JV partners and now you need to send them the books, instead of getting the one big Excel file and deleting everything and shrinking it down, you click on Balance Sheet. You can either do it for the entire period, for that year, or for whatever period of time. It’s a convenience. It’s probably not mandatory, but it’s probably something recommended.

The reports are easy and there are lots of options.

I have no clue how to put a check in QuickBooks. I have no clue how to do many things but I know how to run a balance sheet report detail and a profit loss detail. I can do that and I can manage my business off of that. Shaun, you can get a CSV file as well. These reports Debbie typically sends are Excel but if you have somebody they can export in a CSV as well. Exporting as a PDF.

You can email reports to yourself. You can export them to excel, PDF, and you can do all kinds of things.

It’s nice because if someone says, “You only pay me $1,500.” You can go run the report and quickly see, “Here it is.” The other thing is sometimes you may have miscoded something, and certainly not Debbie, but I said, “Debbie, this one goes here,” whereas especially when you have a JV partner that has two different assets. You may have paid them but for your bill pay system, you put it for the wrong asset, and you realize, “Oops.” Later on, you’re having that and it’s not showing. It’s difficult to see when you get a big report, but when you run it, everything by each asset, it makes it much easier to see as well. From a bookkeeping perspective, it’s affordable. It’s not tens of thousands of dollars that you’re spending on bookkeeping services.

You don’t pay that much?

What’s that?

Books don’t lie. Click To Tweet

I’m kidding.

I don’t know but I own 6 or 7 entities in the grand scheme of things.

No, it is affordable.

When you have an entity getting going, Debbie, correct me if I’m wrong, but you basically will look at somebody’s business. Every note investor is not the same for one business. You have 1, 50, or 1,000 assets it’s structured from that perspective. My entity with 150 notes versus Jamie’s with 50, Jamie will pay more because I’m a nicer guy.

You pay with personality.

Sometimes, within their books, some assets are handled one way and some are handled a different way.

I’m glad that Jamie and Debbie get to handle his New York assets now.

Debbie, I’m sorry.

I know, it’s funny when I see an address, and I’m like, “I’ve seen that address for years now from one investor to the next.”

You’re not going to like these.

I’ll see who they sold it to. I’m like, “That’s my client, so now I’m going to see it.”

Where can they reach out to you?

I can set up your QuickBooks. I can help you one on one.

You can go to DMBookkeeping.net.

My email is Debbie@DMBookkeeping.net. My office phone, I don’t answer it FYI. It’s there for her voicemail, client calls, or if I have conference calls or something because 99% of the calls I get are junk.

Reach out to Debbie, if you are an animal lover as well. Debbie is heavily involved in adoption, rescue donation, and volunteering at Bark4Dogs.org. I’m an animal lover, so something as well for individuals. I highly recommend for people who are serious about this business to reach out to Debbie. Have the conversation and see what fits for you whether you think you can take it on yourself and do quarterly, annually, or say, “Debbie, please take these from me.” I’d recommend that if you do, to do it sooner rather than later because I’m guessing that if it’s a complete disaster, that’s been for a few years, you probably end up paying more. Sorry but it’s how it works. I’m not going to speak for Debbie, but I know I would charge more.

We are getting ready to send out new engagement letters for 2021, Chris.

I’ll need to send you the scroll of all the entities that we’ve got because I do have several others and have another one as well that’s thrown in there.

If you do email me, I do return email. Not always timely because I spend my day on whichever clients supposed to be spending my day on. It’s always my little disclaimer, but when I do address my email that’s there, it will never get deleted until I address it.

GDNI 133 | Bookkeeping For Note Investors

Bookkeeping For Note Investors: As you start with a new note space, a bookkeeper should be near the top of your hiring list.

 

She does people’s books alphabetically by last name, not first name because Jamie always seems to get his before I get mine. I’m mentioning that.

It’s more that it’s the low-hanging fruit. It’s a warm-up of yours.

Funny story before we get off. Debbie and I go through five entities and we always start with Seveney Investments or my 401(k) because those are soft spots. We spent five minutes on those.

Those are easy.

We get to Onyx. That’s a fund. If you have funds, funds are easy to believe it or not for books compared to a JV. We do the fund and it’s like, “We’ve got the Onyx.”

I have one LLC with one rental property. It’s growing, but I seem to get that one back first.

I don’t send any until they’re all done but when I start reviewing them, I always review the easy ones first.

That makes sense.

I’ve got some entities and it’s a matter if you want to stab yourself on the arm or the left arm. We’ll hit all the other ones and it’s like, “Can we do this tomorrow?” You want to procrastinate and put them off.

I appreciate it when my clients understand that about their books.

All kidding aside, one thing I’ll mention to people as well, and this is from me, coming from the corporate world, do your books every month. You need to manage and you should understand where you stand every month. Three things from my corporate world are you always want to know your caste position, how much money you’re making, and where things stand overall. For the top two, you definitely want to know, what’s my P&L? What’s my caste position? What’s coming down the pipeline? Am I taking a hit? Am I going to be making some additional money? Those are three key things. Because what you don’t want to do is you have an asset that you own and all of sudden you lose $10,000 on. You don’t want to go all sudden take a distribution that all sudden is like, “I’ve got to put that money back and I use that money to pay for my kid’s college or something.” You should always focus on getting your books done on a monthly basis.

Not to dry it out but one of the things I always hear is when we’re an asset being removed and we’re calculating the game, sometimes there’s a lot, but a lot of people are like, “I thought I made more.” Because all of your expenses are in QuickBooks were on the Excel spreadsheet. You might have missed writing something down. You’re like, “I forgot about that. $3,000 in taxes that I pay.” They’re always like, “I made more,” because it doesn’t lie in black and white.

Debbie, thank you, as always. We do this yearly and we’ll do this again. We’ll probably do this honestly, probably in, definitely not April but typically we do one in the spring, point in time, and also do another later on towards the end of the year, typically November or December timeframe. It’s to remind everyone who is chasing all these W-9s from people that they can’t get 1099 because they don’t have them. You’re going to laugh. I’m telling you, people, you’re going to see come early January, people complaining on Facebook, “I don’t have W-9s from people.” You had all year to get it. I’ll say it’s like going to vote. You knew what the election was coming.

One thing I will add at the end here is, Debbie, I did a Facebook poll, and you may have seen it in the group about podcast episodes and podcast topics. Bookkeeping was the number one or it was close to the top. Our group does understand that books are pretty important. That’s a good thing.

It’s good and you’ll be amazed at what you learn about your business as you’re breaking things out.

You’re right. It’s interesting, because I’m analytical, but I’ll look at what my last opportunity cost last year? How much should I spend on tighter reports and BPOs that I didn’t get? That’s an important number to know. How much am I spending it on? The other thing too is Debbie will say, “You realize this bank is charging you $5 a month because you haven’t done anything.” You’ll pick up those things as you do your books or other costs that, “I have this subscription for $20 a month that I completely forgot about and I never used.”

It’s a good time, especially now, at the end of the year to go through and look at them again and see, “I don’t use this. Cancel.” As your business evolves and grows, you’re going to change and it’s not going to be the same system you use as you continue to grow. I’ve used thousands of different systems and spent thousands I shouldn’t have but it’s another important factor when you do your books properly, you can easily spot that. We will wrap up. Debbie, thank you as always. Jamie, I spend too much time with you.

Thanks for having me.

Thanks, Debbie.

Thank you, everyone. Take care, go out and do some good deeds.

Important Links:

About Debbie Mullins

GDNI 133 | Bookkeeping For Note InvestorsBusiness Owner at Multiple Entities

 

 

 

 

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