The Importance of Account Heirarchy in Real Estate

Finances are one of the most important and delicate aspects of real estate, whether you’re buying or selling a home, renting property, budgeting for a move, and more. Real estate isn’t a cheap business either, so managing money is paramount to ensure smooth transactions. In the current real estate market, there’s a lot of money changing hands. Cash purchases have also risen in recent years, with CBS News reporting that 46.8% of luxury homes were bought entirely with cash in the three-month period ending on February 29, 2024. With a wider range of payment options and the need to navigate a costly housing market, staying on top of accounting and finances is a must to keep everything clean and orderly. One way to do so is by establishing an account hierarchy, which can help organize and structure accounts involved in a real estate transaction. Here’s what you need to know about account hierarchies and why they’re important in real estate:

What is account hierarchy?

An account hierarchy is a critical component of effective financial management. Softrax’s definition of account hierarchy emphasizes that the term refers to the structure, organization, and categorization of accounts for easy financial reporting, analysis, and management. It functions like a filing system for your financial data, categorizing transactions by relationships in a chart of accounts, as well as the sub-accounts and categories under each account. By structuring it in a hierarchical manner, it’s easier to outline any responsibilities, permissions, and functions. In real estate, this system can help property management companies streamline financial reporting and manage access to data so the business can easily track any transactions and monitor financial health. 

An account hierarchy provides structure to your finances and outlines responsibilities per level.

Enhanced financial reporting

A structured and well-designed account hierarchy can make financial reporting much easier. Property management companies can easily generate balance sheets, income statements, or cash flow statements when transactions per account are organized and detailed. The hierarchical structure enables you to view high-level summaries of income and expenses and provides more detailed information about specific properties or projects. In a real estate chart of accounts, you can categorize based on assets, liabilities, equity, revenue, and expenses, but you can also set up sub-accounts under these main categories for more detailed data. You can also track multiple projects and clients, enabling you to evaluate each one's financial health and performance for better reporting and decision-making. 

Streamlined cost management

Ensuring projects and properties stay within budgets and that costs go where they need to is essential for real estate cost management. Deloitte reports that the real estate industry is bracing for lower revenues in 2024, exacerbated by global economic conditions and world events. As such, managing finances is paramount for success and sound financial performance. Establishing an account hierarchy can help real estate firms pinpoint where money is going. Organizing by property, unit type, expense type, and other categories can make it easier to evaluate how funds are being spent and allocated. This allows property management companies to optimize budgets or identify areas of improvement to enhance cost control measures, ensuring that projects are executed on time and within monetary constraints. 

Cost management helps you optimize your budget.

Improved decision-making and budgeting

With a clear view of the financial health across your properties and projects, you can make more informed decisions on resource allocation and optimization opportunities to enhance cost management and pricing strategies. Combining this accounting structure with other property management solutions like Yardi can help you create a beneficial experience for renters or residents throughout the whole residential lifecycle. A well-structured account hierarchy can also serve as the basis for creating realistic and accurate budgets. By understanding where money is flowing and analyzing past data in the hierarchy, you can better predict income and expenses. This also helps residents plan out their own expenses; our “Budgeting For Your Move” post highlights that moving into a property can come with many fees and unexpected costs. Understanding your budget and how much things will cost can help you work with clients to clarify any pricing matters and expenditures