The Basics Of Creating A Balance Sheet with Debbie Mullins

GDNI 63 | Creating A Balance Sheet

Creating a balance sheet could be intimidating especially if you don’t know anything about managing books. Debbie Mullins, the bookkeeper to the stars of note investing, explains the basic concept of bookkeeping. She shows us how to create a simple balance sheet and shares the benefits of doing your own books. She also gives her insights on the most common bookkeeping issues, and reveals the key information in your balance sheet that could have the most critical consequence when done wrong. Debbie also shares useful and practical tips on how to record expenses that were paid using your personal card, what to do when you accidentally transferred money to and from the wrong bank account, how to pay yourself, and more.

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The Basics Of Creating A Balance Sheet with Debbie Mullins

We are excited to have with us a professional that many of us in the note business use, someone we find incredibly indispensable and someone to whom we make tearful phone calls regularly on the subject of bookkeeping. When we mentioned that we were willing to have an episode on bookkeeping, we were overwhelmed by yeses, big thumbs up and smiley faces. We’re thrilled to introduce to you if you have not met her, Debbie Mullins, the bookkeeper to the stars of note investing. Welcome, Debbie.

That was a generous introduction. I appreciate that.

You’re the one we all turn to. We all talk about you, know your reputation and look up to you. At what percentage of your business is note investors and how many of your clients are normal people?

Most of my clientele are real estate investors. Maybe not necessarily notes but probably 90% of my clients are investors. I started working mostly with those who did flips and rentals, the buy and hold. I started making some connections in some of the circles of note investors. I started helping them as well. As a CPA, I work here locally. I was working with the note client. He said, “Call Debbie because she works with investors.” That was the first investor I met and now I know lots and lots. I have been at it about a few years, but 90% of my clients are real estate investors of some type. A large number of those, probably half are notes.

Adam Adams of AJA Investments was the first one and that’s how I got introduced to you, Debbie, was through Adam. I know originally Adam was, and he still does, promoting you and your expertise. One of the things that some people sometimes forget is you are probably the most important component to a business if somebody uses a service like yours because you tell people how’s their money doing?

It was Adam. Adam was the individual I was talking about locally. Adam was the first note investor that I had met.

Was he using you previously before he made notes?

When I first started working with him, he had gotten started or hadn’t been doing it for very long, but he wanted to do the books himself. I would sit with him and train him. I do that as well. I do half-day sessions for individuals who want to do their own books because sometimes, in the beginning, you’re not ready for that expense sometimes to bring on a bookkeeper. I’ll do quarterly reviews with people and monthly, whatever they need. Each time we do that, they learn more. You have more examples and you can build from there. When you get too big and too busy, you can pass it onto me full-time, but in the beginning, people like to get themselves. I’m happy to teach.

Why don’t we roll right into it, Debbie?

I was going to start this like Chris said that when you start a business, I knew that you focused on buying and selling notes, but you’re running a business. There are many more bookkeeping facets to that than buying or selling. You are running a business. When you run a business, especially if you have an LLC or an S corp, you need books. You need profit and loss. You need a balance sheet from day one. I also tell people what you probably know is if you want to be rich, the only thing you need is to own assets and to understand your money. I learned that years ago and it’s true. That’s how the bookkeeping falls into it. A lot of people think about, “I understand my money. I have income and I have expenses.” It’s so much bigger than that, which is the balance sheet. Most of us get the profit and loss a lot of times, but we’ll talk about that as well.

I feel like this is the most important JV relationship preserver in existence also because JVs when you can tell them on short notice exactly where they stand, what their reserves are, how much they’ve spent, how much they’ve made. That’s big.

If you can talk about the money, they’re going to trust you with those. I’m old school and I like to keep things simple. Sometimes there are a lot of different ways to do things. I like to keep it pretty basic. If you’re not already thinking about moving away from only using an Excel spreadsheet, it definitely should be a priority for you to start thinking about having books. In talking to Chris, he had given me a good idea, things that he thought might be helpful for you guys as well. We’re going to talk about the process that you go through. We’re going to try to keep it simple. Getting the funds, buying the note, getting the money from the borrower, paying the bills and paying your JV partner are the areas that we’re going to touch on.

As Debbie said, it would be worthwhile to show everyone the process of a typical day-to-day accounting process that people have to go through in regards to how to answer those questions that we talked about. It’s about knowing your cash position or it’s how much money you have, how much you’ve paid the investor and things like that. With that, Debbie, we’ll let you keep going.

I don’t want it to be technical coding, but that’s what we’re going to talk about because the activity translates into, “What do I do with my books?” I’m still going to keep that at a basic level too. I’m not going into a lot of deep detailed on coding as well. Let’s start with you get money. You get money either of your own money or you get it from a JV partner. What do you do with that money? We know we’re going to assume you have a JV partner and obviously you’re going to owe somebody some money. We’re talking about liability. This is from a balance sheet, for example.

We send all the bad ones to Chris.

I did go through and tried those. What do you do when you’re protecting the innocent or whatever? Here’s a little bit of a different translation between what you do in bookkeeping because you guys always get more money from your JV partner than it’s going to cost for your asset. You can buy your asset. You have extra funds available for the costs, to help to cover the cost. You think of it separately, but it’s one liability. You’re getting this money from them. That’s how much money you owe them. People start trying to split that in their books and handle it differently. It’s one liability.

You owe that person $24,000, however it’s split doesn’t matter. You owe him $24,000.

I put that memo. Sometimes we’ll put a good memo so we know exactly what’s going on. “I bought the asset for $20,000. I asked for $4,000 additional in cost. In the end, I owe this person $24,000.” It’s going to fall on your balance sheet. It’s going to be a liability. You fund the deal. You’re going to buy the assets. This is going to be things you would code on the balance sheet. These are assets. These are going to be the assets that you’ve purchased. I like to use assets that maybe I own and assets that have JV partners. There’s nothing different about these. These are all assets. It’s like I’m using subaccounts for clarity. If you’re doing any bookkeeping, this is the name I’m using. You write a check when you buy an asset. I paid $6,000 for that asset. I bought and it’s the same thing. I wrote a check for $4,000.

The purchase price is the value of the asset. I know that comes up with you as well because you bought it for $6,000, but it’s worth $20,000. You’re not writing a check for $20,000. You’re writing a check for $6,000. It’s your asset. You keep it simple. The other thing I always say in bookkeeping is you always follow the money. This is exactly what happens is what you want your books to look like. You have the asset and the borrower is going to start making payments, principal and interest payments possibly. That’s one scenario.

This is important for people because this confuses me the first time is when you started getting payments. I understood the asset is on the asset side of the balance sheet. What you owe the JV is on the liability side, but how you separate the principal and interest, that blew my mind the first time. Pay attention.

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It’s probably the most confusing part. Every time I first start to work with a new client, we start doing this and they start seeing how it falls on the balance sheet that usually takes them some discussion to make it clear. That’s what we’re looking at. This first deposit that we get from Madison or whoever the servicing provider is that you use, that deposit is principal and interest. Sometimes they subtract servicing fees and there’s late fee income. Sometimes there’s a lot of activity in one deposit. Every one of those line items has to be accounted for. If that Madison statement has ten lines of data, the entry that I do in QuickBooks is going to have ten lines of entries as well.

You can’t put payment of $300 for principal and interest in your books. You have to put $100 principal, $200 interest.

Let’s take this deposit on 3/12. Sometimes you get two months at a time as well. Since this has the same date, I know it’s the same deposit. $62.19 and $62.71, that’s the amount of the principal of that deposit. These might not quite line up exactly. It’s not the same set of books, but the interest that you would get on that same day in that same deposit of Madison, could be one-line item but it might also be two-line items. If you split the interest with a JV partner, you would be giving half of it to the JV partner and by that I mean coding it to the liability. We’re giving the JV partner $410, but we might also be giving you $410 on the profit and loss as your own income or maybe it’s $410 and you give it all to your JV partner and you don’t keep any of it.

I’ll try and simplify it down if you get a payment of $500. $100 is the principal that goes up on the asset line item and the liability, the interest, what goes to the JV goes as a liability. What goes to you, it goes on your P&L. This is what was confusing when you think about the liability and why does the principal go to one and not the liability. The principal is paying down the principal of what you paid, even though the UPB is much higher. It brings that down. That’s where you see the balance at $58.75. On the liability side, there’s that $410. You notice that there’s a check that’s made out to Mr. and Mrs. Nice Investor that zeroes out the liability back to $24,000, which is still the liability because you’re giving them the interest right now.

You owed them $24,000. When the interest came in, we coded that there. We gave them their interest in April. We gave them some interest in May and you wrote them a check and gave that interest to them. It zeroed it out. This is what’s nice about watching that money for the JV partner. Sometimes you split the principal and the interest with them and that’s where it gets a little more skewed when you see it. We have to apply all of the principal up here to the asset. It was $62, but you might decide to pay your JV partner half of that, but we can’t split it on your books because right now you’re getting principal towards that asset. It all has to be applied here.

For people out there, it’s very important when you have a bookkeeper, you tell them how your JV is set up. It’s important because not everyone does everything the same. You don’t want them assuming how it’s done one way, get all your books done and say, “That’s not how it’s supposed to be.”

I have that example. I was working with an investor. I do it monthly for them, but some investors tend to look at their books every month and some don’t. They keep saying they’re going to, before they know it, a few months have gone by. This particular investor wasn’t checking his books that often. About a year into it, we had been splitting everything 50/50. He said, “I do everything, 70/30.” We had to redo all the splits for 70/30. I was like, “Somewhere along the line.” Sometimes you’re going through things, you’re talking about things so much. We probably said it a million times splitting it in half, splitting it. You don’t think, “I split it 70/30, not 50/50.” Your books will reflect that.

We do the same thing with late fee income. Sometimes you split that with your JV partners. Sometimes people keep that themselves. This was the same thing. This came in and it was $156. You each got $78.75. The deposit came in, we coded $78.75 to the JV partner. We quoted $75.78 on the profit and loss as your own interest income. These are subcategories that don’t have to be there, but I like it to be clear. It could be all of the liability coming in and out, but it helps me balance things when I can see the interest I’m giving, “Here’s the interest I’m paying. I’m giving them late fee income. I’m paying them the late fee income.”

The other thing I’ll mention when you talk about that too is a comment for people. Not all servicers are the same when it comes to reporting numbers for you on your books. Madison does a pretty good job. There are some out there who I know that used to make me pull my hair out. I know Debbie years out and I’m not going to name them, but make sure you understand how they’re reporting back to you. It can also cause a lot of heartache and headache on trying to do your books and spend a lot of time and costs that you shouldn’t have to that you need to factor in your business.

I can tell you, Madison does a good job. They’re one of my favorites because I look at each one of them from the reporting standpoint, how easily I can look at that and translate that into the books. Some of them aren’t as good. I will say at the end of the year when I reconcile Madison, we get 1099 they send, it shows how much interest for the year, how much principal for the year. I should be able to match my totals to that totals. At the end of the year, that’s how I know we have everything correct. We’ll get to the end of the year and it won’t match. Every month the statement matched. There are times we have to go back to these vendors and say, “What’s up? Why doesn’t every statement when you add it up match the total at the end of the year?” Somewhere along the line they made changes, they reallocated things along the way and you don’t know it until the end of the year. In other words, we catch a lot of changes or sometimes there are mistakes that vendors make along the way.

GDNI 63 | Creating A Balance Sheet
Creating A Balance Sheet: Sometimes there’s a lot of activity in one deposit. Every one of those line items has to be accounted for.

 

I can tell you from my own experience. There are changes that occur. It’s going to happen. If I had to do it myself in 2018, I probably would have had spent a few weeks trying to figure everything out. Debbie does my books for me. She had it figured out in a few hours. Right then and there, it’s worth the expense for the whole year.

We went back to Madison on two or three different ones.

There was one of them that was a nightmare.

I’ve had that on mortgages, loans and things as well. I’ll have every month in there and the dollar amount matches all twelve-month statements. At the end of the year, it doesn’t match. I’ll tell them, “How does one plus one all year long equal five?” A lot of times it’s a mistake. They go back and they fix it on their end. It looks very black and white. That’s the other benefit of sitting down and doing your books or having a bookkeeper like me do it, it’s a double-check. It’s a fresh eye. If it doesn’t match, if it’s not black and white to the penny, we know something’s wrong.

Debbie, your recommendation for people if they do their own books, how often should they make sure they’re updating them and reconciling them?

That’s probably one of the mistakes, in the beginning, one is not doing your books and not having the profit and loss and balance sheet, but the second is not doing it often enough. That can depend on your volume. If you’re doing a few transactions a month and getting started, if you sit down at the end of every month and you get your bank statement in your data and you do it once a month, that’s fine. As you grow, when you get bigger, sometimes it needs to be twice a month or once a week. Usually, it will depend on your volume if you don’t want to get too far behind.

If you have JV partners, you’ve got to do it at least once a month in my mind.

Minimum, just like the business world, if you have an accounting department, they’re closing out the month. They’re reconciling every month. That’s the minimum.

We throw out terms like reconcile. Can you explain what that means for people so they understand what exactly that means because some people may not know?

When you reconcile, you are matching it dollar for dollar, penny to penny to an actual statement. You have your bank statement beginning balance, the bank statement ending balance. In QuickBooks or whatever you use, you can see your bank account as well. It needs to be exactly the same as your statement. The same thing with a Madison statement, at the end of the year you get an annual statement. If the total interest they say they paid you doesn’t match the total interest you have, then it’s not reconciled. It has to match something official as well like a 1099, 1098, things like that.

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That’s very helpful. The one thing I’ll throw into about managing books too is don’t wait until the last second and try and figure out, “How am I sending everyone 1099s and all this other stuff?” Remember that trying to go to get a bookkeeper at that point in time, at that point of the year is pretty much impossible because they’ve already booked with clients. They’re up until 3:00 in the morning trying to get everyone else’s books done.

That’s when I get most of my new clients in February and March every year. I’ve already had a couple of calls where people are scrambling because they did an extension and now it’s time and they still haven’t done anything. There’s not much. When I sit down with a new client and we start going through things, you would think in a couple of months we can have it all together, but we’ll go back and forth for a few months trying to iron everything out. Whenever you’re working backward, you miss every time or it’s like a fish story, you find one thing and it grows into something else.

Hopefully, trying to keep these as simple or as clean as possible. It’s very visual too because in your books if it’s like this on your report, the principal makes this go down. Your total is going down. If all of a sudden you have something over here, you’re like, “I probably coded something wrong or maybe I check balanced and they did get a return.” You’ll certainly have those things happen. Your books can be very visual too, like this for example. That will be the next thing that we talked about is you have bills and you have these costs on your assets. We’re going to talk about paying them as well as how they look on your books. You’ve got $4,000 extra money from your JV partner to start covering costs. This is the area that you’re typically looking at. There’s not going to be an opening balance here of $4,000 that you’re using up.

That’s what confused me originally because I was treating it with a bank account that $4,000 and you’re pulling it out of. That’s where a lot of people sometimes get confused too.

That’s the biggest hurdle. That’s almost why I mentioned at first because that’s the first thing. They want to start splitting this up and coding it differently. It was your way to market it. It was your way to justify getting the money, but you got $24,000. You watch this total up here. You’re like, “When I get to $4,000, now I’m probably putting in my own money type of thing,” but this is a holding cost. When you would sell the asset, you’ll be able to figure out your profit in the end based on the total cost. These are costs and so they should be over here in this debit column. The same thing if it falls over here, you’re like, “Did I do something wrong?” Sometimes it is something good, it’s changed or gets credited back. That’s correct, even though it’s in the wrong column or looks wrong.

I know you want to get technical, but this expression always reminds me of looking at these sheets is I always go by a phrase, “Do cry.” I always do cry when I look at my balance sheets. The way I remember that is the D for debit, has an O, which means that’s all the money going out of your bank account. The cry is not Y, it’s an I. The credit is in. Anything that’s a debit is basically going out of your bank account and credits are going into your bank account.

It was funny, I had never heard that before.

I figured that one out a few months ago because I’m thinking, “How do I always remember the difference between a debit and a credit?” I’m like, “Debit outdo and credit in, okay do cry,” because sometimes you do try to figure this out. Especially when you look at a balance sheet the first time, your mind is exploding, “I don’t even know where to start.”

People do that too. That’s why I say follow the money. It’s one thing at a time, one check at a time, one deposit. I know it’s so big to do automation now. You want everything to be easy and automated, but your books are one of the things that would be the hardest because every entry sometimes has to be split out two or three different ways. It’s different every time. Some things are the same. I pay my telephone bill the same every month. I pay my rent the same every month. Those things can be automated, but not everything else.

One thing, Debbie, I want to make sure we talk about is what to use for Venmo, PayPal, credit cards, wires, ACHs?

GDNI 63 | Creating A Balance Sheet
Creating A Balance Sheet: Your books are one of the things that would be the hardest to automate because every entry sometimes has to be split out two or three different ways and it’s different every time.

 

That’s next on my list. This is where the costs typically fall. It’s like an asset. You’re putting money into your assets. It’s growing in value for lack of a better way. You have to pay all of these bills, MetaSource. You have somebody do a drive-by. You pay for some insurance, whatever you paid for. This is where I get old school. I get particular about the way things are done. I always give you my opinion. Things can be done a lot of different ways. When we pay someone, there are lots of different ways. We’re going to talk about that as well. This is an area that when I’m doing someone’s books that should be pretty cut and dry, but it’s one of the biggest struggles. When I’m asking my clients about buying an asset, which one of these fields do you think is the most important field? Is it the date, the amount, the person you paid, the memo or where we code it? This is not a trick question. This is the basic of basic. I don’t know how old everybody is, but I grew up writing checks. We had to fill in all of this information.

I wrote out four checks because I didn’t want to log in online and stuff. I had a checkbook in front of me. I’m like, “I’m going to write checks and stick them in.”

Sometimes it’s the best option. I know people are afraid to answer. Granted they are all very important, the most important field is the name. When I ask somebody details, I’ll send them their books and I’m like, “What’s this $24,000? All I see is a deposit. That doesn’t tell me anything.” They’re like, “My JV partner gave me $50,000 and that was for 123 Main Street.” “Who is your JV partner? What is their name?” You should have a W-9 for that person so that you have not just their name, but you need their legal name. I also redid someone’s books as well. We were going through them. It was John Smith and Jeff Smith. That’s who the checks were supposed to be to, but it wasn’t. It was ABC LLC, 123 LLC. It was to an entity and not to the person’s name. This is the most important field. It should be whatever is on their W-9. I’ll see this too. One time you’ll write ABC LLC and the next time you write a check to Jeff Smith. They should always be to the same person because your software is the end of the year. You’re going to run a report by how much you paid Jeff Smith. It’s going to pull from that field right there or it’s going to pull from ABC LLC. If it has different names, you’re not going to get a total for one person. It makes sense of why that’s so important.

One of the things is a lot of times you may have JVs wire you money. If you’ve got several of them wiring you the same day and you don’t update or write something down quickly, you’re going to be going back and forth a few weeks later. It’s like, “Who wired me $22,000? Who wired me $16,000? Who wired me $28,000?” It’s very easy to forget where all that’s coming from.

Here’s a good example. We all know who this is. They have a name, you may know Scott. I see a lot of things made out to Scott Carson, even though they probably weren’t made out to Scott. They were probably to We Close Notes. Here’s a prime example when you’re talking to Scott and he sends you his W-9, it doesn’t say Scott Carson. That’s not who you’re paying. You’re paying WeCloseNotes.com.

That’s important because a lot of times, as many of us use, I have 7E Investments. 7E Investments doesn’t own any assets. When people cut me a check it doesn’t go to 7E Investments. That’s what I use for software marketing and everything else. It’s important to understand that because you know who was cutting a check to and not cutting the check to an individual or a company that you think it is, make sure you get the W-9 from them.

Some people say, “You’re not going to send me a 1099 so you don’t need my W-9.” For those of you who have been on a call before, that’s not true. You want a W-9 for this reason in particular, you know their legal name and you know you’re working with a legitimate company. The government requires you to be working with legitimate companies. It can be a person’s name. They can be an individual. They can put their Social Security numbers. They don’t have to have an EIN. It doesn’t mean you have to be a company. It’s proof that you’re working with legitimate companies and that you’re not making companies up, laundering money and sending money to yourself.

The question is what is the best option for real estate investment company to pay bills, purchase assets, pay JV partners, etc.? The options were checked, ACH, banking bill pay, wire transfer, PayPal, credit card, all of the above, cash, Venmo. Every way you can pay somebody, what is the best way to pay someone?

Some of them are equally acceptable. Your first thing is I run a company. I always say, would Home Depot pay somebody via PayPal? Your insurance company, you buy insurance, would they let you pay them via PayPal? If you cancel your insurance and you got a refund, are they going to send you money via PayPal? You run a business so you should always have a business to business transactions. You should try to eliminate those third-party servicers. Can you use them? Absolutely. If I’m going to have an audit trail and that’s what your book should be. These are examples of the bank statement. When I download the bank statement every month, these are the things that I see.

This is the LinkedIn payment. It was an individual transferring to their own account, taking an owner draw. This was a bill pay to somebody. My bank even does this when someone deposits a check, the name and the amount pop up, which is nice because sometimes you get this remote online deposit and you can’t help that. Sometimes that’s what your bank’s going to have. These are actual line items that come from the download at the bank. That’s what I put in my memo field, cut and paste exactly what’s there. Sometimes I’ll do other memos because I have another option down here for something more specific. This is in my books. If I look back, if I’m audited, I have that exact detail of what happened from the bank statement. That’s important.

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I tried to have a conversation with Wells Fargo on their bill pay of when you put in a memo. Why does that memo spit out on the CSV file that I download? I was trying to explain to them why and stuff and unfortunately, they didn’t get it because when I put something in a memo like, “This is for 123 Main Street.” Paying an attorney, I’ll use Franco from Sottile & Barile. I’ve got ten assets with him that I may be paying bills on and put each one to code. When you download the sheet, unfortunately it doesn’t show up so you have to go back into the system.

For example, if I transfer money from one account to another, I am able to put a little memo on mine. It’s not very long but it will show up. Some banks will not have necessarily bill pay. I’m talking about when you do a transfer, sometimes you will see a little memo at the end of these lines as well. Your books are supposed to be great for audits, your historical information. They need to be crystal clear. If every line item you have is this, this one’s not too bad because you do see a name, your bank memo. This usually comes through. Your bank is never going to give you information on a check because it can’t read all the fields that are handwritten. If everything is Venmo and I’ll send a client ten of these like, “These all say Venmo so give me the detail.” Every time they’re like, “Here’s four of them. I don’t remember what that one was.” If that doesn’t help you, you want something strong that helps you.

The more information provided, the more accurate or the less chance of error with your books, in my mind.

You are looking back sometimes a month or two at a time. Even this is all that shows up, but your first guest here would be United Airlines because somebody did a flight and that’s exactly what it is, the little odds here. That’s pretty easy to see. Bill pay is like writing a check, but here is my little warning about bill pay. This doesn’t happen very often, but sometimes those checks do not arrive where they’re supposed to arrive. I had this when I was an accounting manager at an aviation insurance company. The client sent their $4,000 insurance check via their bill pay. What happens is that comes out of your bank right away. You think it’s paid. It goes to this third-party servicing who mails out all the checks and it never showed up.

A few weeks later I’m saying, “They’re going to cancel your insurance because they haven’t received your check yet.” She’s like, “They took it out of my account.” I’m like, “I get that but they physically mail a check and you’re talking about the US Postal Service. It may or may not get there.” That’s a hassle to go back because now you don’t get to go back to your bank. You have to go back to that person, to the third-party that processes this and they can track it down like your bank and see if somebody has cashed it. As you can tell, that’s a long drawn-out headache for you. It’s a little warning about bill pay. There are risks. I’ve seen that four different times over the last few years. Everybody’s like, “I’m not using that anymore.” I’m reading about Wells Fargo contractors.

I’m trying to slowly move into ACH payments because I found PNC has a good program, a system with ACH payments. I slowly hopefully get rolled into that.

ACH payments are the best business to business transfer. You have somebody’s routing number usually and their account number. You transfer directly from your business account to theirs, which is wire but a little different. It costs less. I used to be able to send ACHs for $0.19 each. It’s cheaper for me to transfer directly to someone’s account than to mail a check and pay a stamp. Tell them your story, Chris, your Wells Fargo.

Wells Fargo wanted $3 for every business to business, which I found was insane. It was $1 for a personal. I talked with PNC and they’ve got a program now that it’s a flat monthly fee of $45, but it also includes same-day ACHs if you want as well, which is equivalent to a wire transfer. Typically, you’re paying $20, $30 for a wire, which I’m always doing a few months anyway. The ACHs on top of it is $0.10 per after that or something. It’s a monthly fee, but basically it’s going to save me money because I’m always wiring money. Instead of wiring it, I can do the same day ACH now as long as it’s out the door by 1:00 instead of 2:00 like banks do for the ACH. You can do a same-day ACH and it basically doesn’t cost you anything.

That’s an automated clearinghouse that banks use. It’s the same thing. You go to Home Depot and you return something. All of a sudden, the money shows back up in your account. That’s pretty much what they’re doing. They’re sending it right from their bank to your bank account.

You mentioned that what if somebody uses their Home Depot personal bank account, but it’s for business and transferring it back and forth? You accidentally use the wrong card. I do that once in a while where I used my personal credit card or I used ABC Inc. instead of XYZ Inc. When ABC owns it, and I use XYZ.

GDNI 63 | Creating A Balance Sheet
Creating A Balance Sheet: ACH payments are the best business to business transfer because you can transfer directly from your business account to theirs.

 

Occasionally, we have accidents that happen. If you use a personal card accidentally and we can record those things in your books. The way I do it is I create a bank account called The Owners Bank. It’s a tool that I use and I would enter the charge to Home Depot on the date for $100. I make another entry at $100. That’s an owner contribution to the company. That’s saying, “You used your own personal money for a business expense.”

I know people sometimes get concerns with the commingling of funds and stuff, but that’s not commingling of funds. Commingling of funds is more when you’re taking money out of business to buy stuff for your personal residence or because accidents like this do happen. You’re tracking it. You’re keeping it. It’s no different than “I’m putting $1,000 into the company for something else out of your own personal money.” That’s investing in your business, not commingling in it.

Accidents happen and even transferring between companies like, “I moved $5,000 from this company to this company and I did the wrong company.” All you do is turn around and transfer it right back. You have this in and out of $5,000 and that’s fine. That’s going to happen, but you do want to catch those things. You want to notice when you’re using the wrong account. Everything can be captured and fixed along the way.

I notice you chuckled a little bit when I mentioned that, Debbie, was that a little bit of a dig at me?

You knew in the beginning that you might have accidentally sent something to the wrong account.

Due to and due from are my favorite things in my bank account typically.

Here’s one of the biggest things too. If somebody has two LLCs and they want to take money from one and put it in the other because they need money to pay their bills. You cannot transfer money from one company to another. If you do, that second company owes it back. Now it is due to that company again. It’s a due to, due from. If you’re like, “I’ve got a lot of money over here and I need to invest over here,” you need to take that money out of one company and put it in your personal bank account. You take $5,000 out and that’s an owner draw. You’re going to put $5,000 from your personal account into the second company. That’s an owner contribution. That makes it legitimate coming out of one company to you, going from you into your other company. If you go company to company, that second company now owes the first company money. That’s like accounts receivable and accounts payable. To pay for anything, a credit card is definitely the best way because if you pay credit card, you have fraud. You have other benefits, but you also don’t have to send 1099 to anyone that you pay with a credit card at the end of the year, no matter how much money.

If the person accepts credit cards.

They may not. That’s why I’m saying that’s the best option. Someone was talking about the handyman and things like that, they’re not going to take credit cards. They typically want some type of simple payment, maybe a PayPal or something like that. That’s understandable, but you want to keep in mind that you’re a business. You want the direct business to direct business transaction.

We have a question, credit card versus debit card, the same best practice or not?

Don’t wait until the last second to do your books. When you work backwards, you miss or find something, and it grows into something else. Click To Tweet

It’s different in the sense that your debit card is fine, but it’s you paying a bill like this. If I use my debit card, it’s always purchase authorized, that 7-11 purchase authorized wherever I’m shopping. You’re responsible for those payments and 1099. The credit card is responsible for reporting how much money was sent to businesses for 1099.

If someone asked, they were not aware of the exemption for 1099 recurring credit cards. Is that new?

No, it’s not. A credit card has always issued those to their clients and their customers.

It’s not that the person’s not getting it, it’s that the credit card companies issue it instead of you as the individual.

When we did this a few months ago when I said that during that webinar as well, that was probably the most popular thing that I said, “If you pay via credit card, you don’t have to issue 1099.” You still need a W-9 because you still have to know who that company was. You need to make sure they’re legitimate, but you won’t be issuing 1099 at the end of the year.

Did you also want to touch base quickly on the P&L statement?

I’m talking about business practices versus bookkeeping, but it’s one and the same because it’s every transaction that you handle in your business is your books.

I should stress that as one of the most difficult things of being a note investor. You may own a few notes and stuff, but having a note investing business is a step up. Managing and making sure your books are always clear, clean and organized is extremely important. Trust me, when you start having JV partners, right around distribution time, they’re all calling, “When is my distribution? Where is it? How did you come up with this amount?” If your books are not in order, it doesn’t reflect well on you.

You can put together nice Word documents and Excel documents. You send that to your JV partners. I see a lot of those because my clients will send that to me. I’ll look in the books and see if it matches after we’ve broken everything out and 90% of the time those are wrong. It’s only because it’s human error and you’re pulling together numbers. You’re putting together documents versus something like this that you’re entering dollars and pennies and every transaction in their accounts. You miss stuff when you’re doing it by hand. I can also tell you that the payouts in the very end like here where we get to these gains and losses. When I take over someone’s books, 98% of the payouts were also incorrect. That usually means that you as the owner lost because you paid the JV partner probably too much. Maybe the split didn’t work out. I’ve rarely seen it where somebody owed the JV partner more money. It’s seen it where you cheat yourself on the money.

Where that happens a lot is sometimes you close them out too early and this drives me nuts when I have an attorney sending you a bill a couple of months later for $600 for a foreclosure or something. It’s like, “I’ve already paid the JV out,” and now it’s like, “I’ve got a $600 bill that should have come out of the money.” Essentially, now you’re taking it out of your profit. Work in your contracts and stuff to work something where you give them a good portion of their money. I always recommend holding back a little bit of a reserve until you confirm that your books are clean and that assets closed out.

GDNI 63 | Creating A Balance Sheet
Creating A Balance Sheet: You can’t rush your books. You have to make sure that every entry is done 100%.

 

You can’t rush your books. I tell people all the time. You have to make sure that every entry is done 100% and that’s the only way that it’s ready to go. This is a little bit of the profit and loss. Typically, in the notes investing business, very little hits the P&L because you have all your assets and all of those holding costs are falling on that balance sheet. Your liability is falling on the balance sheet. Honestly, when you’re rocking and rolling and you have all this interest income coming in and you’re selling and making a profit, that’s what’s going to hit here. Your profit and loss is your business. When you have the asset and you own it all by yourself, you’ll see more of it hit the profit and loss.

You’re selling it. Your portion hits the profit and loss because it’s your gain. The other half you gave to the JV partner and that hit the balance sheet. I’ll see a lot of things on the profit and loss that belong on the balance sheet. This is your money. This is the interest. This house, we have a JV partner. This was half of the interest received. I got half and the JV partner got half on the balance sheet. This one I’m saying there’s no JV partner. When I got that $65 from Madison, it’s all mine. It’s all right here. I make these memos each time because they’re not mine. I’m doing your books. I can’t remember everybody’s without having some note that reminds me every month that one had a JV partner, this one doesn’t. I’ll do those memos to help me. Anything on the late fee income, this one is split. It was $6.60. This one was $4.76 in total.

On the gain and sale, isn’t there something that you need, if it’s a foreclosure, you sell the asset, physically sell it, you need the HUD statement because the thing is calculated differently as well?

Yes. That’s the difference with all of these flippers and people who buy rentals. I have a HUD when the transaction happens. I know exactly what day something’s bought and exactly what day it’s sold. With notes, there’s not always that documentation or that all of a sudden I see a deposit or I see a check being written. If you have foreclosed on it and now you own the property, when you would then sell it, you’re going to have an actual HUD. When I say a HUD, it’s a closing document. When you go to the title company and you sell this property to someone else, those documents get broken out in detail, just like a Madison statement gets broken out in detail. That’s how we calculate the gain or the loss. If you sell an asset, we have a setting on the balance sheet. Now it’s sold, how do we get it off of the balance sheet? We have to zero everything out. We end up with this gain or this loss. It’s either all yours or maybe you’re splitting it with someone. This transaction gets a little complicated.

Once you put in the initial things and go through your bills and so forth, trying to split interests with JVs. I know that it can sometimes be confusing. When you go to close out the asset, it’s like you’ve got to close everything out on your balance sheets and every different location then split everything and eventually makes its way. Would you say that’s the most complex component?

Yes, it is. This is a made-up number. It’s after everything is zeroed out and everything’s done. Whatever’s leftover is the gain. You don’t have anything to reconcile that against to make sure it’s correct. All of those things along the way that you’re doing, they’re matching statements along the way. That’s how you know that the backup basically is correct. At the very end, whatever is left over is going to be this gain or sometimes a loss. We try not to have losses. You can see that’s what this is.

The key takeaways on that are profit and losses, things that go on there are monies that aren’t part of JV deals. If you have the software or you’re part of memberships or things like that, those are going on there. You have your gain and loss of sale, due diligence on expenses, especially if it’s a lost expense. You went after an asset and you end up not buying it, that’s a loss on your profit and loss statement because it was something you went to acquire and spent money on.

This part represents that part of the P&L because you’re going to have your bank fees, due diligence, telephone expense, computer and internet expense, advertising. You’re going to possibly have all kinds of expenses that fall on the profit and loss, but they should all be about the business. That’s why I left it here. I was like, “This was stuff that we paid for that had to do with a property, but we didn’t buy it.” That’s why it falls on profit and loss. If we had bought it, we’re going to coat it on the balance sheet as a cost for a particular house or property.

One thing I’ll ask Debbie is you have your P&L, which has money in it now, which is the company made money. How does a person get the money to pay themselves? Can they pull the money out of the account and say, “I’m putting it in my checking?” How should they do that?

People think that when they take money out, so maybe at the very bottom of this, it shows for the year we made $10,000. They write themselves a check along the year. Maybe they’ve taken $1,000 owner draw or $2,000 owner draw. When you put money into the company and you take it out, it’s your equity in the company. If you have an LLC, you don’t have a salary. If you have a normal business in here, you’d have a salary expense. You’d have Medicare expenses and unemployment taxes and things that get pulled out. Those would be actual expenses that hit your profit and loss.

One of the most difficult but important things about being a note investor is making sure that your books are clear, clean, and organized. Click To Tweet

For your LLC, here’s the profit and loss. He only made $92, not $10,000. You have all your income coming in. You have expenses and you end up with $92. Nowhere in here does it talk about money you put into the company or money you took out. That falls over here on the balance sheet. That’s your equity in the company because it’s an LLC. When you start having an S corp, you are supposed to be taking a salary. If you ever have to start taking an actual salary, use a service because they’ll take care of taking the taxes out and paying those for you. You don’t ever want to worry about paying the IRS on time.

If you have an LLC, can you still take a salary if you want?

Yeah. You can take an actual salary anytime you’d like, but salary and payroll are not throwing money in your company and taking it out like, “I’m starting my company. I’m going to start it with $10,000.” I’ve put $10,000 in. I’m like, “I’m making money so I’m going to take $5,000 of that back out.” That’s not your salary. That’s your equity in the company. If you pay yourself a salary, you do. You have a withholding. You have withholdings for Medicare, unemployment and your federal taxes. You have to make payments. You collect those or you keep those. You make payments to those entities. Always use the payroll service. I used to be an accounting manager and I always outsourced my payroll because I never wanted not to pay somebody or not have it correct.

If this person had the $92 and they said, “I’m going to take this profit and go take my family on vacation or something,” how do they get it out of the company?

If I wrote myself a check for $92, it still isn’t going to hit over here. It’s still going to hit right here. I’m taking $92 out. Here is the big misconception is that people think they can take draws like, “I have money in there. I’m going to take a draw all the time.” At the end of the year, you show a negative. You lost $10,000 but over the course of the year, you took out $20,000. You’re supposed to take profit from the company. This would mean for the year, you shouldn’t take more than $92. When people are taking lots of money out, they’re taking someone else’s money because your JVs are probably giving you lots of money. You’ve got $300,000. At the end of the year, if you only made $1,000 but you’ve taken $5,000 out, you didn’t have $5,000 to take out. What your CPA will normally do is they will recode this up here and it’s going to be due from a shareholder, which means you took money that you shouldn’t have and you owe it back to the company.

That’s not something you’d like to see. You don’t want to owe your shareholders, which are your JV partners. You don’t want to take their money that is in there. Debbie, I know we had a conversation about how many bank accounts I have because having a profit bank account or an owner contribution bank account and having an operations account, which has all the JV partners’ money. You keep it separate as well. You’re never taking from it and managing each asset on your balance sheet to make sure you’re not taking from Peter to pay Paul.

That’s probably one of the misconceptions is that an owner draw is you’re taking profit from the company. That’s when you’ll hear, “He took a quarterly draw out of it because he knew the first quarter.” That his books showed that he made $100,000. He took $5,000 for himself and that’s fine. People don’t always connect those two as being important. They also think this is salary. That’s not salary. It’s taking money from the company.

If somebody made $10,000 on a deal and like, “I want to take that money out.” What is the more CPA question of, “How do I cut myself a check or do I cut a check withholding taxes on it?” How does this person take it out?

That’s where people get focused like, “I made $30,000 on this, so I’m going to take $30,000 out.” You have to remember all of your other business expenses along the way and if you have a P&L, you shouldn’t have to ask your CPA. You should be able to see when I added that $30,000 and I had these expenses, “I have $10,000.” You would know that you could take $10,000, but people don’t think about the company as a whole. They think of this, “I made $30,000, I’m going to take $30,000 out.” You always have to look at everything and not just the one-line item.

We’ve probably blown a lot of people’s minds. Debbie, tell us a little bit about the services that you do provide because you do provide different levels of services to people, whether it’s consulting or doing books and things like that.

GDNI 63 | Creating A Balance Sheet
Creating A Balance Sheet: The more clear your transactions are on your bank statement, the fewer questions there will be.

 

I am a realtor. I do a little bit of property management as well. Anything related to real estate investing and for the bookkeeping, that’s my name. That is my main business though. I do monthly books for my clients and the way that works is I have access to their bank accounts and credit cards. I go in every month and download the data. I put it into QuickBooks and do these nice pretty little reports. I send it to my client every month. I highlight anything that I don’t know the answer to. I get used to something. I can guess that 80% or 90% of stuff sometimes but obviously as the client, they’re your books and you have to fill in the blanks for me. We go back and forth every month and have an ongoing profit and loss and balance sheet.

I set up QuickBooks for people so I can set up your initial QuickBooks, set up the chart of accounts that matches what you need for note investing. I even do the initial data dump. If you want to send me your bank data dump, I don’t code it but I dump it in there for you. I spend an hour with you showing you what I’ve done and that’s where people who are like you want to do it yourself, but you want to have the right QuickBooks file and the right chart of accounts. I do the sessions as well. I do half-day sessions for the same type of clients. They’ve been working on it for a month and they want to sit down, look at it, ask questions and learn more.

As part of the services, if you’re doing the books, do you do the 1099s and reconcile the account at the end of the year and all that information, all that stuff too?

I’ll do 1099. I do have strict criteria in the sense that if all of the name fields are not filled in if you haven’t provided me feedback all along the way and helped me fill in all the blanks, I’m not going to send those until that’s done. That might mean that we missed the deadline in January, February. As long as the information is there and I feel like it’s going to be accurate, I process those for my clients and send those out as well. We do that by January 31st of every year. We’re reconciling monthly to all of your statements as well. You might get 1099 from someone for something. We need to make sure that what they sent you is what we show you received in the book. We reconcile all of those. If you have a CPA, I can send whatever they need like certain reports and take an accountant’s copy of QuickBooks. I can do that and send that to your CPA. If they have generic questions, I can answer those. Typically, they need to come to you with questions about their data or your activity.

Some people sometimes get scared away when they think bookkeepers because sometimes they think CPA and accountants that might charge $500 a month for things and stuff like that. That’s not the case. It depends on your business, your structure and everything. I’m not putting numbers in Debbie’s mouth and stuff, but it’s structured like that. It is something that from my personal experience, I find it to be affordable. One of those things that save time and allow you to focus on your business, but you also understand where everything’s coming from. Debbie said, “The most important thing is another set of eyes.”

When we sat down and do training, I would say a half-day, but it’s three-and-a-half hours. People think, “That’s a long time,” but I promise you it goes by fast and we probably don’t get to everything that you want to get to. It’s long enough to be productive. I don’t do an hour here or an hour there because I do those books like for Chris. I schedule my clients. If they’re a half-day client or if they’re a full-day client. That’s how I block out my schedule. I do the training half days when I can fill in the blanks type of thing. I’m not able and I don’t want to be billing people by the hour and in an hour, you don’t get anything done anyway.

For people, Debbie does four entities for me. I know you’ve got a lot of work behind the scenes, but once I get the books from Debbie and stuff, we’re at a point now where it’s probably under an hour a month of back and forth for four entities.

That’s why when I’m particular about those things you use, the clearer your transactions are on your bank statement, the fewer questions I have. We don’t have to go back and forth as much, but if everything says deposit, I have no idea what any of that is. I have to ask you, you’re going to end up having to tell me who each one was and what it was for. When your banking is clear, that saves time on both ends.

That hour consists of 70 to 90 active notes. To give you an idea of how much time I spend now on my books per month versus if I was putting all that information in.

It’s funny because I’ll open somebody’s books thinking it’s going to be like the month before and all of a sudden they bought twenty new assets.

That person is trying to remember where all that money came from and trying to code it and everything else.

Along the way, I’ll tell people too every time you buy something, send me an email right then or send me the document right then especially if it’s got an actual HUD where you sold a property. “I went to this closing. I find all my documents and send that to Debbie. When she does my books, it will be sitting there and she can break it out.” It’s the same thing with notes. Some of my clients are good. I bought three notes and they still forget the name but they say, “I bought three notes, here are the addresses and here are the amounts.” They do forget to tell me who they bought them from.

The last thing I’ll mention is if you do partials. That’s also another animal on your books. It’s one of those things where if you’re doing a partial, make sure you let your bookkeeper know because I’ll let Debbie explain that process as it is different.

In one way it’s almost exactly the same, but we do handle it a little different. It depends how you set those up, but sometimes I assume you set up an amortization chart possibly or maybe you are getting a payment and passing it straight through to that setup. Even though you call these partials, it is a liability. It’s the same thing. They’re giving you $20,000, but they’re expecting to get $30,000 or $40,000 back. Without elaborating on that too much, it’s still a liability but we have to know what the deal is so I will know then how to allocate it or you in your books. There is one side of it with a partial that maybe you’re taking all the interests when it comes from Madison on the profit and loss as income, but you’re writing a check to that partial. It’s an interest expense that offset your interest income. That’s a little different than giving it to your JV partner and paying it. That’s a structure. It depends on how you have it structured with that person.

Depending on the complexity of your business, the more complex your business, the more complex your books get.

Thank you. I enjoyed it. I’m always here to help if you need it.

Thank you, Debbie, for joining us. We want to thank you for joining us as well. In the meantime, the best way to contact Debbie, her office is (682) 502-4489. Her email is Debbie@DMBookkeeping.net. Thank you all.

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