Can you tell me why you always use journal entries and not through typical acct ledgers? Is it because it isn't a typical A/R item but a loan reimbursement.
Great info! Very instructional videos, keep up the great work. I have a question regarding this method, wouldn't this create a minor issue during year end if the property hasn't been sold? The improvements to the property would be treated as COGS for the year even though the property has not yet been sold?
TLDR: The video provides a detailed tutorial on how to manage construction loans and budgets in QuickBooks Online for real estate investing, including tracking loans, budgeting, and categorizing expenses. 00:00 🏗 Learn how to manage construction loans and budgeting in QuickBooks for real estate investing, including logging properties on the balance sheet and differentiating between projects. 01:41 🏗 Tracking construction loans and budgets in Quickbooks Online can be done using classes or customers, each with their own advantages and disadvantages. 03:58 🏗 Learn how to manage construction loans and budgets in Quickbooks Online, including adding liabilities for loans and simplifying transactions for private lending, as well as recording property purchases and using sub-accounts for mortgages. 06:16 💰 When getting a loan for property improvements, the bank may withhold a portion of the loan until different stages of the project are completed, and this withheld amount should be accounted for as a liability. 07:35 🏗 Set up construction asset at escrow, designate as current asset, transfer funds to checking account for construction expenses in QuickBooks. 10:06 🏗 Categorize expenses using products and services or chart of accounts for budgeting in Quickbooks Online. 11:48 🏗 Enter yearly budget by customer, track construction costs, and note restrictions of the user interface in Quickbooks Online for construction loans. 14:35 👍 Post your questions in the comments for video responses, check out free resources at income.dex.com, and stay tuned for budgeting and Podio tips in the next video.
Hi Nidia, You would log the land to the balance sheet....whatever the purchase price is. Then, all the money that goes into the build will be added to the "Building" sub-category. As you spend money, the expenses are logged to the balance sheet.
How should we track the movement of funds from the construction escrow account if the draws are paid directly to the contractor? Because we need to decrease the amount of the escrow (asset) and increase the amount of the loan (liability), right? and those would both be credits to each respective account, so the journal entry wouldn't zero out? I have a clearing account, I just don't know how to create the entry(ies) for this. Thanks!
Great Question! We actually just went over this in our Live Q&A Sessions this week (which everyone can access with the end to end course bit.ly/reabcourse). If you have a "funded" escrow account...that means that the loan balance should already be reflected to include this construction balance. If not...meaning your loan balance is only the funds lent for the house...then you would have 0 in construction escrow. In this case, when you get a draw, you credit the Loan Account (increase the balance) and you Debit either 1. Your bank account (you get the funds directly) or 2. Accounts Payable (your contractor gets the funds. This assumes you first create a bill for funds due to the contract) In my experience, the above is rare. More commonly, you owe the entire loan balance (including construction) and the construction funds are put into an escrow account. This means that every draw will have no impact on the loan balance...only the construction escrow.
Thanks@@Incomedigs! So in the first scenario, in order to mark the bill as paid, do I need to create two journal entries? 1. credit loan account and debit clearing account (cash on hand) 2. credit clearing account and debit A/P? Or can/should that be done in a single journal entry? Thank you so much, all of your resources are super helpful!
@@MelanieYee-t2h You are probably paying the contractor with your own cash first. That would mean that you record a bill payment to the contractor...from your checking account. You would then just have one journal entry: Credit the loan account, debit the bank account (this is the draw) If your bank is paying the contractor directly...then you would Credit the Loan Account and Debit Accounts Payable. In either case...only 1 journal entry is needed....but the first would require a separate "bill payment". I definitely recommend checking out the course! We're talking about this and so so much more all the time in our community: bit.ly/reabcourse
Received a loan for rehab, deposited to the loans payable liability account. I still feel like I need to journal entry and debit the construction loan asset account. Where would the debit go to? The asset of the building?
Hi! You would create a separate "Other Asset" account to capture the "Construction Escrow". As you receive draws, you will Credit this account and Debit your Checking Account.
Hey John! That's really up to you. I would say that most of my students put Flips on the P&L. If they have a flip that spans more than one tax year, we would transfer the P&L balances to the Balance Sheet. Its a personally preference. The reporting out of "Projects" is nice...and can only be done w/ P&L accounts. But, of course, this will skew your business performance metrics throughout the year.
Hello there. So I am little confused. I watched your previous video where you show how to enter the information from the HUD closing document when we purchased a rehab property. IE - Rehab Purchase Price, Rehab buying costs, as the debits Totally different than what you are showing now. I set everything up as projects using customers. Also you used COGS. Is it done differently in the project module? I never entered JEs for Fixed Assets. Perhaps that is why my balance sheet is way off and not actually showing the home purchased. Should the accounts I mentioned be subaccounts to Fixed Assets?
Hi Lisa....Thanks for watching! As I answer...remember that QBO is a tool to help us run our business. We can use different strategies depending on our specific situation. So, whichever strategy (or combination of strategies) makes most sense for your busines is the route you should take. For Flips, investors often want to see "expenses" as COGS...as opposed to on the balance sheet. This helps to match "actuals" to a "budget". If you were to take this route, your fixed assets might be completely empty. You would, instead, incur negative net profit until the project is complete. If, instead, you wanted to show these assets on your balance sheet....then yes: You would log transactions to a few sub-accounts within Fixed Assets. I typically recommend: 1. Land 2. Building 3. Closing Costs 4. CapEx (All rehab costs associated w/ the project). In most cases, if the FLIP is not completed within 1 tax year, you would end up transferring your COGS to your balance sheet for tax reporting. You would Debit the Fixed Asset accounts above and Credit your various COGS to bring them to 0. You can use the above technique throughout the year as well...if you wanted to use the COGS for budgeting but the "Move" them to the balance sheet to have a more accurate picture of your business equity. We discuss a lot of these strategies within the Real Estate Accounting Bootcamp Community as well as on the Live Q&As. www.incomedigs.com/reab
Ahh, that makes sense. Thank you for that explanation. I was looking for the asset on the balance sheet and I thought I did something wrong. I get it. So most of the time we would just be looking at the projects to see the expenses and wait till the end to see the bigger picture once I transfer and zero cogs out. Thank you! I’m going to check out your classes. It would definitely help me!!
Hey Nick, thanks for your videos. They are always a huge help! I was curious how you do cash flow planning for your business. We have a number of rentals and flips going at any given time. I track them in a spreadsheet separately but I think our approach lacks scalability and is error prone. Right now I'm putting in cells how much we expect to spend on rehab by month, tax payments, rehab draws, income, etc. - all sorts of stuff. I'm sure there is a more elegant way to do it - probably in QBO - and was curious if you had any suggestions.
Hey Wesley, thanks for reaching out! And what an amazing question! I have had the same struggle to find a good solution for cashflow planning. Most software is good at telling you what happened in the past...but not so good at predicting the future. QBO, up until recently, didn't even touch on the subject. However, QBO does now have a featured called "Cashflow". This feature will take past transactions to provide an initial baseline for what to expect in the future. You can adjust the assumptions made by QBO to tweak a bit. You can also add "events' to the cashflow. These events act as data points that QBO would have no idea about: Future flips in the queue, hiring a new employee, etc. Personally, I am still using a custom spreadsheet that gets very specific with my projects (probably much like yours). However, I'm working on brining my process into QBO to really "stress test" the system. I'm cautiously optimistic. On the surface, you can tell that they understand the need for a feature like this...we'll see how it executes! I'm planning to have a specific lesson on Cashflow Mgmt in our updated version of Real Estate Accounting Bootcamp: www.incomedigs.com/reab
Thank you so much! I had this setup incorrectly for a client that is now flipping homes. Quick question, if you don't mind....When you receive the actual construction loan draw deposit from the bank, how do you code it? I'm using the Escrow account to keep up with the draw balance like you suggested, but I'm missing the actual deposit coding when it comes through my bank feed. I'm also coding the rehab expenses as direct costs then doing a journal entry to move them over to the balance sheet at the end of the month. Hope that helps clarify my question. Thanks so much! Do you cover this entire process in detail in your course?
Hi Perri...thanks for watching! Okay...the draws! So if the draw funds are stored in your escrow account...you are on the right track. This escrow account should be "Other Current assets". When the cash gets deposited into your bank account, you simply code it against this same Escrow account. This will, in effect, create a journal that debits your bank account and credits your escrow account. Yes...we do cover this in the course...plus many variations throughout the community questions and the live Q&A sessions. We'd love to have you! incomedigs.com/reab!
Thank you so much for making that video. It really helped. So know I need to know a little more about construction loans/ draws in a different matter. I am the contractor and I build a home for someone. They have a construction loan and when I submit their bank to pay me and sub-contractors how do I categorize it? For example I am requesting a draw for 3 invoices for sub-contractors.... we can just say invoice 1 - $500, invoice 2 - $1000, invoice 3 - $2000.00. I want these expenses to go towards my project BUT I have to have to have it come out of a payment account....what payment account do I use? It is not coming out of any accounts I have set up. If I makeup a bank draw account under that project it shows as a liability on my balance sheet..... ??? I hope you are able to understand my question.
Thank you for this video! I'm wondering if you have a video about how to record a HUD when you sold the house built including the construction loan? I'm having a little trouble leaving my Construction Escrow in 0.
Hi Stefany...thanks for watching! I would be happy to address this question in a video. I would need a bit more context as to how the transaction is working. In the scenario...you are the one selling the house. Did you have a construction loan to build the house? Or is the new buyer purchasing with a construction loan. Any details you can provide would be helpful.
@@Incomedigs Great! Well, the company that I work for they started construction projects that's why I'm kind of lost. So, yes we bought the land and we asked for a construction loan to a money lender. When we bought the land in the HUD my Escrow for construction was $199,043.00. And during the construction they gave us the following draws: - 59,070.00 + Wire fee $200 - 50,063.00 + Wire fee $200 - 65,140.00 + Wire fee $200 - 20,170.00 + Wire fee $200 First I'm not sure how to record those wire fees I put them on bank fees, but they are suppose to be part of "our construction loan". The total amount of those draws plus the wire fees, is not the same that I previously had on the Purchase Hud.
@@stefanyocampo206 Thanks for the info! Okay....so let's dive into this. If we just think about the construction loan itself for a minute.....I am assuming that the total of the 4 draws above (194,443) left your escrow account at $0. While the bank might have lent you $199,043, that does not necessarily mean they would disperse all of that in cash. In addition to the Wire fees, there were likely other fees to be accounted for. The journal entry for the loan itself would be a Debit (+) to the Escrow Account (current asset) in the amount of $195,243 (194,443+800), a Credit (+) for the loan account in the amount of $199,043 (That is the actual value of the loan that your company agrees to pay back). The difference (3,800) must be some other expense that the bank is charging (origination fees? points? etc). Whatever it is, you would Debit(+) the expense account to deal with this difference. Does the HUD have a line item or multiple line items that make up this $3,800? Let's take the first Draw as an example as to how to deal with the wire fee. When the draw is disbursed, you would Debit(+) your Bank Account $59,070. You would Credit (-) your Escrow Account $59,270 (59,070 + 200). The difference is the wire fee. As you guessed, You would Debit your Bank Fees Expense account that $200. Does that help? Again, happy to dive into this further one on one if you would like. Feel free to email at nick@incomedigs.com.
How do I document the closing disclosure after the home sold, I entered the construction loan as you described in this video, now I have sold the home. How do I document this?
Hi Davis...thanks for watching! When you sell the home, you'll need to "0 out" your construction loan...as you'll be paying it back at closing. You would Debit the total outstanding amount of your construction loan in your final journal entry. This will, of course, reduce the amount of cash you come away with at closing. We cover many topics like this in our end to end course: www.incomedigs.com/reab
Check out my End-to-End Quickbooks Training. www.incomedigs.com/reab ($50 off w/ code TH-cam50)
Can you tell me why you always use journal entries and not through typical acct ledgers? Is it because it isn't a typical A/R item but a loan reimbursement.
Great info! Very instructional videos, keep up the great work. I have a question regarding this method, wouldn't this create a minor issue during year end if the property hasn't been sold? The improvements to the property would be treated as COGS for the year even though the property has not yet been sold?
Yes! You would make a year end journal entry to move the COGS over to a fixed asset.
TLDR: The video provides a detailed tutorial on how to manage construction loans and budgets in QuickBooks Online for real estate investing, including tracking loans, budgeting, and categorizing expenses.
00:00 🏗 Learn how to manage construction loans and budgeting in QuickBooks for real estate investing, including logging properties on the balance sheet and differentiating between projects.
01:41 🏗 Tracking construction loans and budgets in Quickbooks Online can be done using classes or customers, each with their own advantages and disadvantages.
03:58 🏗 Learn how to manage construction loans and budgets in Quickbooks Online, including adding liabilities for loans and simplifying transactions for private lending, as well as recording property purchases and using sub-accounts for mortgages.
06:16 💰 When getting a loan for property improvements, the bank may withhold a portion of the loan until different stages of the project are completed, and this withheld amount should be accounted for as a liability.
07:35 🏗 Set up construction asset at escrow, designate as current asset, transfer funds to checking account for construction expenses in QuickBooks.
10:06 🏗 Categorize expenses using products and services or chart of accounts for budgeting in Quickbooks Online.
11:48 🏗 Enter yearly budget by customer, track construction costs, and note restrictions of the user interface in Quickbooks Online for construction loans.
14:35 👍 Post your questions in the comments for video responses, check out free resources at income.dex.com, and stay tuned for budgeting and Podio tips in the next video.
Yes! Thanks for watching and summarizing!
How would this work for a construction loan to build? Not a rehab and no existing building as building from ground up. Thanks
Hi Nidia,
You would log the land to the balance sheet....whatever the purchase price is. Then, all the money that goes into the build will be added to the "Building" sub-category. As you spend money, the expenses are logged to the balance sheet.
How should we track the movement of funds from the construction escrow account if the draws are paid directly to the contractor? Because we need to decrease the amount of the escrow (asset) and increase the amount of the loan (liability), right? and those would both be credits to each respective account, so the journal entry wouldn't zero out? I have a clearing account, I just don't know how to create the entry(ies) for this. Thanks!
Great Question! We actually just went over this in our Live Q&A Sessions this week (which everyone can access with the end to end course bit.ly/reabcourse).
If you have a "funded" escrow account...that means that the loan balance should already be reflected to include this construction balance. If not...meaning your loan balance is only the funds lent for the house...then you would have 0 in construction escrow. In this case, when you get a draw, you credit the Loan Account (increase the balance) and you Debit either 1. Your bank account (you get the funds directly) or 2. Accounts Payable (your contractor gets the funds. This assumes you first create a bill for funds due to the contract)
In my experience, the above is rare. More commonly, you owe the entire loan balance (including construction) and the construction funds are put into an escrow account. This means that every draw will have no impact on the loan balance...only the construction escrow.
Thanks@@Incomedigs!
So in the first scenario, in order to mark the bill as paid, do I need to create two journal entries?
1. credit loan account and debit clearing account (cash on hand)
2. credit clearing account and debit A/P?
Or can/should that be done in a single journal entry?
Thank you so much, all of your resources are super helpful!
@@MelanieYee-t2h You are probably paying the contractor with your own cash first. That would mean that you record a bill payment to the contractor...from your checking account. You would then just have one journal entry: Credit the loan account, debit the bank account (this is the draw)
If your bank is paying the contractor directly...then you would Credit the Loan Account and Debit Accounts Payable.
In either case...only 1 journal entry is needed....but the first would require a separate "bill payment".
I definitely recommend checking out the course! We're talking about this and so so much more all the time in our community: bit.ly/reabcourse
Received a loan for rehab, deposited to the loans payable liability account. I still feel like I need to journal entry and debit the construction loan asset account. Where would the debit go to? The asset of the building?
Hi! You would create a separate "Other Asset" account to capture the "Construction Escrow". As you receive draws, you will Credit this account and Debit your Checking Account.
Hey Nick - so are we putting the flip on the P&L or the BS as well?
Hey John! That's really up to you. I would say that most of my students put Flips on the P&L. If they have a flip that spans more than one tax year, we would transfer the P&L balances to the Balance Sheet. Its a personally preference. The reporting out of "Projects" is nice...and can only be done w/ P&L accounts. But, of course, this will skew your business performance metrics throughout the year.
Thank You is making more sense now
Hello there. So I am little confused. I watched your previous video where you show how to enter the information from the HUD closing document when we purchased a rehab property. IE - Rehab Purchase Price, Rehab buying costs, as the debits Totally different than what you are showing now. I set everything up as projects using customers. Also you used COGS. Is it done differently in the project module? I never entered JEs for Fixed Assets. Perhaps that is why my balance sheet is way off and not actually showing the home purchased. Should the accounts I mentioned be subaccounts to Fixed Assets?
Hi Lisa....Thanks for watching! As I answer...remember that QBO is a tool to help us run our business. We can use different strategies depending on our specific situation. So, whichever strategy (or combination of strategies) makes most sense for your busines is the route you should take.
For Flips, investors often want to see "expenses" as COGS...as opposed to on the balance sheet. This helps to match "actuals" to a "budget". If you were to take this route, your fixed assets might be completely empty. You would, instead, incur negative net profit until the project is complete.
If, instead, you wanted to show these assets on your balance sheet....then yes: You would log transactions to a few sub-accounts within Fixed Assets. I typically recommend:
1. Land
2. Building
3. Closing Costs
4. CapEx (All rehab costs associated w/ the project).
In most cases, if the FLIP is not completed within 1 tax year, you would end up transferring your COGS to your balance sheet for tax reporting. You would Debit the Fixed Asset accounts above and Credit your various COGS to bring them to 0. You can use the above technique throughout the year as well...if you wanted to use the COGS for budgeting but the "Move" them to the balance sheet to have a more accurate picture of your business equity.
We discuss a lot of these strategies within the Real Estate Accounting Bootcamp Community as well as on the Live Q&As. www.incomedigs.com/reab
Ahh, that makes sense. Thank you for that explanation. I was looking for the asset on the balance sheet and I thought I did something wrong. I get it. So most of the time we would just be looking at the projects to see the expenses and wait till the end to see the bigger picture once I transfer and zero cogs out. Thank you! I’m going to check out your classes. It would definitely help me!!
Hey Nick, thanks for your videos. They are always a huge help! I was curious how you do cash flow planning for your business. We have a number of rentals and flips going at any given time. I track them in a spreadsheet separately but I think our approach lacks scalability and is error prone. Right now I'm putting in cells how much we expect to spend on rehab by month, tax payments, rehab draws, income, etc. - all sorts of stuff. I'm sure there is a more elegant way to do it - probably in QBO - and was curious if you had any suggestions.
Hey Wesley, thanks for reaching out! And what an amazing question! I have had the same struggle to find a good solution for cashflow planning. Most software is good at telling you what happened in the past...but not so good at predicting the future. QBO, up until recently, didn't even touch on the subject.
However, QBO does now have a featured called "Cashflow". This feature will take past transactions to provide an initial baseline for what to expect in the future. You can adjust the assumptions made by QBO to tweak a bit. You can also add "events' to the cashflow. These events act as data points that QBO would have no idea about: Future flips in the queue, hiring a new employee, etc.
Personally, I am still using a custom spreadsheet that gets very specific with my projects (probably much like yours). However, I'm working on brining my process into QBO to really "stress test" the system. I'm cautiously optimistic. On the surface, you can tell that they understand the need for a feature like this...we'll see how it executes!
I'm planning to have a specific lesson on Cashflow Mgmt in our updated version of Real Estate Accounting Bootcamp: www.incomedigs.com/reab
Thank you so much! I had this setup incorrectly for a client that is now flipping homes. Quick question, if you don't mind....When you receive the actual construction loan draw deposit from the bank, how do you code it? I'm using the Escrow account to keep up with the draw balance like you suggested, but I'm missing the actual deposit coding when it comes through my bank feed. I'm also coding the rehab expenses as direct costs then doing a journal entry to move them over to the balance sheet at the end of the month. Hope that helps clarify my question. Thanks so much! Do you cover this entire process in detail in your course?
Hi Perri...thanks for watching!
Okay...the draws! So if the draw funds are stored in your escrow account...you are on the right track. This escrow account should be "Other Current assets". When the cash gets deposited into your bank account, you simply code it against this same Escrow account. This will, in effect, create a journal that debits your bank account and credits your escrow account.
Yes...we do cover this in the course...plus many variations throughout the community questions and the live Q&A sessions. We'd love to have you! incomedigs.com/reab!
@@Incomedigs Excellent! Thank you so much for taking the time to answer.
Thank you so much for making that video. It really helped. So know I need to know a little more about construction loans/ draws in a different matter. I am the contractor and I build a home for someone. They have a construction loan and when I submit their bank to pay me and sub-contractors how do I categorize it? For example I am requesting a draw for 3 invoices for sub-contractors.... we can just say invoice 1 - $500, invoice 2 - $1000, invoice 3 - $2000.00. I want these expenses to go towards my project BUT I have to have to have it come out of a payment account....what payment account do I use? It is not coming out of any accounts I have set up. If I makeup a bank draw account under that project it shows as a liability on my balance sheet..... ??? I hope you are able to understand my question.
Thank you for this video!
I'm wondering if you have a video about how to record a HUD when you sold the house built including the construction loan? I'm having a little trouble leaving my Construction Escrow in 0.
Hi Stefany...thanks for watching!
I would be happy to address this question in a video. I would need a bit more context as to how the transaction is working.
In the scenario...you are the one selling the house. Did you have a construction loan to build the house? Or is the new buyer purchasing with a construction loan. Any details you can provide would be helpful.
@@Incomedigs Great! Well, the company that I work for they started construction projects that's why I'm kind of lost. So, yes we bought the land and we asked for a construction loan to a money lender.
When we bought the land in the HUD my Escrow for construction was $199,043.00. And during the construction they gave us the following draws:
- 59,070.00 + Wire fee $200
- 50,063.00 + Wire fee $200
- 65,140.00 + Wire fee $200
- 20,170.00 + Wire fee $200
First I'm not sure how to record those wire fees I put them on bank fees, but they are suppose to be part of "our construction loan".
The total amount of those draws plus the wire fees, is not the same that I previously had on the Purchase Hud.
@@stefanyocampo206 Thanks for the info!
Okay....so let's dive into this.
If we just think about the construction loan itself for a minute.....I am assuming that the total of the 4 draws above (194,443) left your escrow account at $0. While the bank might have lent you $199,043, that does not necessarily mean they would disperse all of that in cash. In addition to the Wire fees, there were likely other fees to be accounted for. The journal entry for the loan itself would be a Debit (+) to the Escrow Account (current asset) in the amount of $195,243 (194,443+800), a Credit (+) for the loan account in the amount of $199,043 (That is the actual value of the loan that your company agrees to pay back). The difference (3,800) must be some other expense that the bank is charging (origination fees? points? etc). Whatever it is, you would Debit(+) the expense account to deal with this difference. Does the HUD have a line item or multiple line items that make up this $3,800?
Let's take the first Draw as an example as to how to deal with the wire fee.
When the draw is disbursed, you would Debit(+) your Bank Account $59,070. You would Credit (-) your Escrow Account $59,270 (59,070 + 200). The difference is the wire fee. As you guessed, You would Debit your Bank Fees Expense account that $200.
Does that help? Again, happy to dive into this further one on one if you would like. Feel free to email at nick@incomedigs.com.
How do I document the closing disclosure after the home sold, I entered the construction loan as you described in this video, now I have sold the home. How do I document this?
Hi Davis...thanks for watching!
When you sell the home, you'll need to "0 out" your construction loan...as you'll be paying it back at closing. You would Debit the total outstanding amount of your construction loan in your final journal entry. This will, of course, reduce the amount of cash you come away with at closing.
We cover many topics like this in our end to end course: www.incomedigs.com/reab