Real Estate Accounting

It was 1998 or so when I bought my first Baltimore shell.

It was an end of Group Row home on a corner that was zoned for 2 units.

It was a gang hangout before I got it. Before that, from what I'm told, it may have been an abortion clinic.

Learning to gut and rehab row homes took time and a lot of teachers.

Learning to shed the energy of the spaces took longer.

Learning to account for it all with ease in ways that are relevant to all of my needs as a small real estate investor has taken even longer. Shockingly longer, and for no logical reason given it's all just basic addition and subtraction.

And finally, after 22 years of pursuit, I've been able to identify the primary contributor to my Real Estate Accounting confusion.

These Real Estate Accounting Problems started when "they" introduced the "Mortgage", a "closed ended credit product" as an alternative to the "Line of Credit", the "open ended credit product" that was prevalent in all times prior.

Line of Credit Lending = Open Ended Credit = your Credit Card !!

With "Line of Credit" lending, all the accounting control is with the borrower,
and the bookkeeping is very simple.

The borrower establishes a credit account with zero balance.

Money is taken from the credit account and used for some purpose.

Once a month the borrower pays interest to the bank for the outstanding balance on their credit account.

f money they have used in their .

If the borrower would like to reduce their credit balance, and thus reduce their interest payments for the following month, they can make payments anytime during the month to do that, as desired.

"Open ended credit" is synonymous with "revolving" creditIf your credit card is maxed out, and you pay it down, you can then respend what you paid down. The "respending or reusing" of credit is summarized as "revolving" credit. Your Credit Card is a perfect example of Revolving Credit. Your credit limit on your credit card is secured with your credit score and your verbal promise to repay.

When real estate is used as a security instrument for a larger credit line, the borrower is responsible for paying Taxes to the state and Insurance to the insurance company.

When real estate is used as a security instrument for a larger credit line, payments to reduce the outstanding balance are often made in round numbers for easy math, and any time there was available credit on the line of credit, the borrow could make a cash advance or withdrawal one of several ways.

And away we go with Borrower Centric Banking...

With that system there is no "forced, monthly principal payment". With that system there is no no complex dis-similar principal and interest amounts to track

An "open end" Line of Credit should be thought of as "secured credit card".

as compared to the "closed end" credit of a mortgage where the maximum amount is allocated at time of origination.

That's exactly what it really is both ideologically and functionally.The thing that challenges that simple thinking the most is the difference in interest rate for "cash advances". Everyone is terrified to take a cash advance on a normal cc due to the crazy interest rate. That exact same process on your HELOC "credit card account" can be done by using your credit card at a store or withdrawing money at an atm, and the only interest rate that applies is your main borrowing rate which is typically in the 3-6% range.

It is delightful and it can be tracked as a single "Liability Account" in your books with ease.

Line of Credit Lending vs Mortgage Lending

Comparing the simplicity of an "open end" Line of Credit to a far more complex "close-end" credit vehicle like a mortgage is like comparing a beautiful butterfly to a ball of gnarled yarn.

Mortgage Lending

With a mortgage, a maximum credit limit is set based on the value of the home, exactly like it is with a Line of Credit. However, starting with the first payment you are required to pay interest PLUS principal in a forced pay down system that will typically last 30 years.

The big difference you need to focus on between Mortgager Lending and a Line of Credit is the required PRINCIPAL portion of the payment on the mortgage which does NOT exist on a proper line of credit.

Proper Lines of Credit only require you to pay simple interest on what was outstanding that month. They do not have any requirement to pay down any principal at any time. You just pay interest on what you have borrowed, just like a credit card. With a line of credit, if you are maxed out, you can not borrow any more. If you decide to pay the balance down some, your interest is lower next month and you have credit to spend up to the amount you paid down again. (ie the payments in and out for principal can "revolve"). This is termed "open ended credit" because there is no fixed date upon which the money is due. You borrow for as long as you'd like to keep the account open and play by proper rules, just like a credit card.
Proper Mortgages require a portion of the total credit amount issued initially to be paid down each month along with interest. The problem is that the money you pay down against the maximum credit balance can not be accessed again for use. And instead of calling that balance your "avaialble credit for use" they call it your "principal balance" that can not be accessed again easily.

The bookkeeping for a "mortgage" is this far more complex. It requires an "Asset" Account to pay the bills, it involves a "Liability" account to hold the initial debt value, and it requires a "Contra-Liability" Account to track principal pay down before it's applied in the recasting process or at payoff.

To make it all make sense as well as a General Journal for most who want to keep it easy out of the gate in a digital age. And as for "depreciation"? Whatever. That was only relevant when a complex tax code was relevant.

With the move towards "Mortgages" from "Lines of Credit" at the same time a more complex tax code with "the possibility for temporary federal income tax" was initiated, cognitive financial control was lost to "them" without anyone realizing just how rancid they and it would all become with time.

Surely most will realize the nearly simultaneous timing related to Mortgage Banking Product Introduction, Personal Income Tax Deception, The Flexner Report, The American Cancer Society, The Jeckyll Island Meeting, the Sinking of the Titanic, The Creation of the (Jewish) Anti-Defamation League, The Creation of Rockefeller Foundation, the Push for Global Rockefeller Medicine, The Break up of Standard Oil, the acquistion of all major news papers acros the country by JP Morgan AND the creation of the US FEDERAL RESERVE all within five years to be no coincidence?

And given the only way to kick off Federal Income Tax Collection was with a War, WW1 (aka 'the Great War') was very soon to follow!

The outward benefit to a consumer of "mortgage lending" vs "line of credit borrowing" was a lower interest rate for less flexibility. The inward reason had to do with fractional reserve banking, or so I've been told by Michael Lush. And with that tidbit now, everything almost certainly makes sense.

I find a study of the language to even be interesting. Not the shift in perspective from "line of credit borrowing" to "mortgage lending". With the prior, the system is described from the borrower's perspective. With the later, it's from the Banker's perspective. Coincidence? Magical Intention? Maybe it's both...

The only thing left to do is 1) Explain the confusion 2) Provide a Cognitive Map and Digital Tools so the average bear can do his or her real estate accounting with greater ease and 3) get back to "proper" Line of Credit Lending at the Speed of Light.

As an open source publisher of Free Education Curriculum and Free Software, we need Financial Support. While we cherish donations, for larger contributions, we never like to get something for nothing.

We like Win-Win Transactions the most and we truly hope this can be one of the best deals you've seen in a very long time...

For those of you in real estate investing, there is a way you can support us that benefits you too in a massive way.

On the main menu at the top of this site you should see "HELOC Lending".

On that page/menu I'll educate you on a secret I figured out in 2004 and put to use in 2005 to dramatically increase my wealth, health and financial freedom.

Further down that information I'll introduce you to Michael Lush.

Michael figured out the secret several years after I did. The Secret that made me richer faster was very destructive to his business psyche and career. Once he learned it, instead of selling out, Michael tried to build a business to educate others that was also profitable enough to make it worth his time and effort. And from what I can tell so far, he's succeeding a pretty cool way after what was likely a long and slow start with lots of uncertainty.

I am a fairly quiet member of Michael's "Replace Your Mortgage" Group. I joined because I wanted access to his bank list for banks doing HELOC's in 1st on Investment Properties. For those in the know, that's a very rare bird in deed. In late 2020 and early 2021, with the help of Michael's list, my cell phone, my email and my significant other (for qualifying assistance) we were able to get a HELOC in 1st on an investment property I owned prior. And we did it all without ever talking on the phone to a single banking contact during the entire loan application process.

Since February 2, 2021, my significant other and I have been benefitting from a level of financial freedom I first tasted in 2005 and last tasted in late 2015 after a very bad blow out with Bank of America.

Please review the information on the HELOC Lending page. Please consider joining "Replace Your Mortgage" with the link on this website. For each person that joins this way we get $1000 as a reseller. And if you join that group, access to the information in this website is FREE. Basically, if you buy his education and access to his bank list, we get a portion of your joining fee and this is "free" to you.

If you don't want to join that group, the cost for access to this website is $1000. If you then join his group within 30 days we'll credit you $500 of your purchase back. After that, you'll have to pay full price for both and we'll get $2000 from you. So if you want to donate more, pay us now, then wait 30 days and join his group via our link and we'll get $2000 from you instead of $1000.

Thanks much for your patronage.
Here's to new Real Estate Frontiers unseen in a very long time.

The Accounting Basics you will need are all fully free and can be found at https://www.zap-accounting-software.com/ .

You will need the information and templates in Box 5 and Box 6.

The information in this website helps you "modify" the Bookkeeping Template to be ideal for Real Estate Investing.

I go over all the custom reporting templates and supplemental database applications that dramatically speed up and clarify RE Accounting understanding. This will speed up your personal reporting process, your CPA prop time and cross checking, future Loan Application processes, your understanding of qualifying income, and your ability to assess buy/sell decisions with tax ramifications far more quickly.

There's some tricks to it and moderately complex addition and subtraction. Once you see it you will have it, but it helps to have a Guide walk you through the software modifications and accounting reporting to get going. Especially if it's the one who wrote the software to start with.

More information coming soon....

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