How Real Estate Firms Should Code their Chart of Accounts

Creating an effective chart of accounts (COA) for a real estate firm involves structuring it in a way that supports proper financial tracking, reporting, and compliance with accounting standards. Each account category should reflect the specific financial activities and needs of the real estate business, such as managing properties, tracking income from leases, and handling expenses.

This comprehensive guide explains how your real estate firm should properly structure and code a CoA.

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If you don't have a CoA to work with, download an CSV template of a Real Estate Chart of Account or a Family Office Chart of Accounts. Both templates are a great starting point for building a properly coded CoA.

Before we get started here are a few best practices to keep in mind:

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Best Practices for a properly coded CoA:

• Separate Property Accounts: Ensure income and expenses are easily attributable to individual properties or projects.
• Use Sub-Accounts: Break down large categories like "Repairs & Maintenance" into specific sub-accounts for better reporting (e.g., plumbing, HVAC, electrical).
• Regular Review: Periodically review and adjust the COA to reflect changes in business operations.

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Step 1: Choosing the right accounts:

Choosing the right accounts for your Chart of Accounts could seem like a daunting task. Take a step back and assess what your firm is currently doing, what are they planning to do.

I always like to ask myself a few questions when building a CoA:

• What type of assets and liabilities do we have?
• How many types of revenue and expenses are we tracking?

Once you have figured these pieces out, start by writing down what accounts you will need.

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The following structure allows for efficient tracking, reporting, and analysis, making it easier for real estate firms to monitor performance and ensure compliance with financial standards:

1. Assets
   • Current Assets:
     • Cash and Cash Equivalents
     • Accounts Receivable
     • Prepaid Expenses (e.g., insurance, utilities)
     • Security Deposits (held or received)
   • Property-Specific Assets:
     • Land
     • Building
     • Construction in Progress
     • Capital Improvements (major renovations, upgrades)
   • Other Assets:
     • Investments in Real Estate Ventures
     • Property Management Software
2. Liabilities
   • Current Liabilities:
     • Accounts Payable
     • Accrued Liabilities (e.g., wages, taxes)
     • Tenant Security Deposits Payable
   • Long-Term Liabilities:
     • Mortgage Payable
     • Notes Payable (financing for property purchases or improvements)
     • Deferred Tax Liabilities
3. Equity
   • Owner’s Equity:
     • Owner’s Capital Contributions
     • Retained Earnings
   • Partner or Investor Contributions:
     • Limited Partner Contributions
     • Real Estate Investment Trust (REIT) Equity
4. Revenue Accounts
   • Rental Income:
     • Residential Rental Income
     • Commercial Rental Income
     • Parking Rental Income
   • Sales and Other Income:
     • Property Sale Revenue
     • Commission Income (if applicable)
     • Late Fees or Penalties from Tenants
     • Interest Income (if applicable)
5. Expense Accounts
   • Operating Expenses:
     • Property Management Fees
     • Repairs and Maintenance
     • Utilities (Electric, Water, Gas)
     • Property Taxes
     • Insurance (Building, Liability)
     • Depreciation and Amortization
   • Marketing and Administrative:
     • Advertising Costs
     • Legal and Professional Fees
     • Office Supplies
     • Payroll Expenses for Office Staff
   • Financing Expenses:
     • Interest Expense on Mortgages
     • Loan Origination Fees

Step 2: Code your accounts correctly

Once you have laid out what accounts are going to fit your firms needs, you will need to set up a coding structure to maintain consistency and scalability. This coding structure could be numeric or alphanumeric depending on what type of reach your business has. Keep the longterm goal of your business in mind when you start assigning codes to each account in order to ensure you have allowed enough spacing between account for additions in the future.

Numeric coding would include the following:

• 1XXX – Assets
• 2XXX – Liabilities
• 3XXX – Equity
• 4XXX – Revenues
• 5XXX – Expenses
• 6XXX – COGS

For example:

• 1010 – Cash
• 1210 – Land
• 2010 – Accounts Payable
• 3010 – Owner’s Equity
• 4010 – Rental Income
• 5010 – Property Management Fees

Step 3: Further segment by property type

Once you have your basic coding structure set up, you could begin to breakout your accounts even further by adding a number or letter before certain accounts to tag them to locations or to track by property type. For example:

• Property 1 – Residential
  • 4010-01 – Rental Income – Property 1
  • 5010-01 – Management Fees – Property 1
• Property 2 – Commercial
  • 4010-02 – Rental Income – Property 2
  • 5010-02 – Management Fees – Property 2

Adding alphanumeric values to your coding will allow you to breakout these accounts by city or state. For Example:

• Property 1 – Ohio
  • 4010-OH – Rental Income – Property 1
  • 5010-OH – Management Fees – Property 1
• Property 2 – New York
  • 4010-NY – Rental Income – Property 2
  • 5010-NY – Management Fees – Property 2

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Hope this helps you code an effective Chart of Accounts. If you ever want to chat, contact us here.

-till next time

Josh