When Outsourced Accounting Beats Hiring In-House

“Growth will expose your weaknesses, and the last thing you want is your back office limiting your business.” — Daniel Roccanti, CPA, James Moore & Company

In this Real Estate Industry Update episode, Daniel Roccanti and Kyle Paxton break down the warning signs that your accounting function is falling behind, the true cost of building an in-house team and how outsourced and hybrid models can help growing real estate firms improve visibility, reduce risk and protect investor trust.

Real estate investors often focus on revenue and portfolio growth without stopping to ask whether their back office can keep up. This conversation gets into what that gap actually costs and what to do about it before it becomes a bigger problem.

Resources

• Real Estate Accounting and Advisory Services
• Real Estate Industry Update Series
• Watch: When Outsourced Accounting Beats Hiring In-House

Full Transcript

[00:02] Daniel Roccanti: Welcome to another Real Estate Industry Update. I’m your host Daniel Roccanti, here back with Kyle Paxton for another video.

[00:08] Kyle Paxton: Always a pleasure, Daniel.

[00:09] Daniel Roccanti: Always a pleasure, Kyle. Today we’re going to talk a little bit about outsourced accounting for real estate. Basically, when your company grows too much and that growth breaks your back office or your processes, and what that looks like.

[00:27] Daniel Roccanti: This is something that’s pretty important and unfortunately happens to almost every growing company. The important part is identifying it early so you know to fix it. If you identify it too late, it can really hurt your business. You can actually realize that you grew too much and now have to take a huge step back to get your business back in line.

[00:51] Kyle Paxton: Very good point on being proactive and trying to get out in front of this. We see this story all too often. You have a real estate investor who starts small, starts investing. As they grow, their portfolio grows, the need for a bigger back office expands quickly. Typically you see pain lead to catching up the back office function. On the back of tax season, that often looks like messy bookkeeping and long timelines.

[01:21] Kyle Paxton: You have investors yelling at you for K-1s, you have accountants yelling at you to get questions answered to get those K-1s out, you have banks yelling at you to get the completed tax returns. We see this happen a lot where pressure is coming from everywhere, and that’s not fun for everybody. That pressure gets dispersed to your whole team, your contractors, everyone you’re working with, and creates a strained environment.

[01:41] Kyle Paxton: A lot of times we see this post-tax-season period as a good opportunity to reset. If you had even a little amount of pain around your processes, how can we revamp them? Dan, you wanted to walk us through some signs your accounting function is limiting growth and what that might look like.

[02:07] Daniel Roccanti: Before I get to that, I just want to say how important this is because it can look lots of different ways. Kyle was mentioning it’s not just that your books are bad and need to be better. That’s one thing, and it’s pretty important, but it can be a lot of things. To give you a little context, CFO.com did a survey and 87% of the CFOs surveyed said there’s a talent shortage right now in the finance and accounting world.

[02:35] Daniel Roccanti: We see it here in public accounting. I talk to clients, people in the industry, business in general, and right now there really does seem to be a talent shortage. So when it comes to accounting, if you can’t easily go out and find someone to replace a role, it’s usually a very time-consuming matter. Understanding what your needs are before you even need it is important so you have the time to find good help, rather than just trying to find anyone who can do it.

[02:57] Kyle Paxton: A lot of times, as I get into the signs here, what we see with these growing real estate investors is that you have a lot concentrated with a few key employees. There’s significant risk around those key employees, and often there’s role confusion, too many cooks in the kitchen. If one of them leaves, you’ve got chaos. It could be that key employee retiring, or somebody can just up and leave when the stress gets too big.

[03:49] Kyle Paxton: Jumping into a few signs where you might be seeing your accounting function limiting growth. Daniel and I harp on this in just about every video we do: the monthly close is late. We have the data infrastructure now to make monthly close easy. We should be able to do this timely with real-time data every single month, and if that’s not happening, you’ve got process issues.

[04:33] Kyle Paxton: That is step one in the rest. We’ve got to get that monthly close down, got to have that year-end close down. On your typical multifamily partnership tax return, we should be able to knock that out the first week in February. But to have the prior year-end data situated, monthly close should not be that hard on cash basis properties. We see a lot of sponsors making decisions with back-of-the-napkin calculations and bank balances instead of a clean, updated set of financial statements.

[05:06] Kyle Paxton: The monthly close feeds into that. Tax season brings out investor pain, but if performance is down, a lot of times that pain rises to the surface on year-end investor reporting or when the investor receives that K-1 and it doesn’t align with expectations. Getting out in front of communications to investors to avoid surprises, if there are breakdowns in any of that, it’s a clear sign you have limitations in your growth.

[05:38] Kyle Paxton: A couple other things: the accounting team, whether internal or outsourced, is reactive instead of proactive. We should be able to have data in real time. There should be minimal emergencies. Accounting emergencies are bad. They shouldn’t exist that frequently other than cash flow needs where you’re having an unexpected expenditure. If there are accounting emergencies, that’s a sign of a problem.

[06:24] Kyle Paxton: And in working with your team and any outsourced teams, it all comes back to trust. If you feel like you’re not trusting the numbers you’re seeing, that’s a huge red flag and it’s very important to restructure and work through some different options.

[06:54] Daniel Roccanti: Kyle talked about a lot of potential red flags. That’s really just saying, okay, I might have a problem here. A lot of new people getting into real estate or business in general are focused on making money, which is very important. Profitability is probably the most important thing in business. But then they don’t grow beyond that. Their focus stays on revenue and rent, not on whether they have the right processes in place to handle growth.

[07:45] Daniel Roccanti: When I deal with clients and we’re discussing pain points, I can always tell when they’ve hit that growth stage. They’re used to looking at processes in a very simple manner. Just look at the bank statement, look at cash, make a decision based on that. That was fine when you were small. You didn’t have thousands of transactions happening every month. But now it’s too complex. Your company is too big. You have too many properties, too many investors. Now you’ve got to invest in your systems.

[08:25] Daniel Roccanti: It takes time and money, and I know it cuts into profitability at first. But if you don’t do it, eventually that growth is going to outgrow your whole system. You won’t be able to serve your clients. You’ll be walking blind, and it could crumble your entire business. The biggest tell for me is when someone says, “I think we’re making money, but I’m not totally sure.” That’s because you’re looking at cash, and cash is just in and out all the time.

[09:22] Daniel Roccanti: It starts creeping out. Investors start feeling unsure about you and your business. They won’t reinvest. They’ll start pulling out. Instead of being in a growth stage, you’re just trying to maintain everything you have. You’re stuck in the snowball effect. Growth is always key, but how does your business, as it grows, have the right processes in place? You can absolutely outgrow your processes and hurt yourself in the long run.

[10:05] Kyle Paxton: This conversation is very prevalent right now. One area where I’m really seeing this come to light is through the tighter lending market we’re in and during the underwriting process. As clients try to refinance or get debt on new acquisitions, banks are digging deep. They want the data. The gaps in what we’re talking about cause issues in that process. They reduce bank trust. It creates even more strain at closing, and that’s where accounting emergencies come to light because you need that cash to close and the timeline is tight.

[10:44] Kyle Paxton: Getting out in front of these things and having the right team to interpret the financial statements and communicate that information, that’s how we can really ease the pain right now. The more third parties you rely on, the more the numbers in the books have to be right. No one is taking you at your word. They want to see data. If you don’t believe your own numbers, how is a third party going to believe them?

[11:35] Daniel Roccanti: Next, what do you do once you identify the issue? Your back office is inefficient and you need to figure out what to do next. You have a couple of options. It’s in-house or you’re outsourcing it. There are a lot of pros and cons to both.

[11:55] Kyle Paxton: One of the most obvious things you want to do is compare pricing. If you build an in-house accounting team, that’s going to cost you salaries. An in-house accounting team isn’t one person. At a very small level you can hire a bookkeeper, but most accounting departments are going to be a team, three to five, five or more people. Then you have to think about what happens when someone on that in-house team leaves. Now you have to rehire. Do you have enough capacity if someone leaves? What if two people leave at the same time?

[12:48] Daniel Roccanti: We already discussed that the accounting and finance world feels short-staffed. You’re not going to be able to find someone quickly who is at least capable. Are you able to find people with the right expertise? I can hire 10 people, but that doesn’t mean I hired people with the right expertise. Then there’s control. Do I want more control? Do I need it? Or am I okay with outsourcing? And then scalability. Can I scale with this model?

[13:39] Kyle Paxton: I want to look at this through a couple of different lenses, because I do see a lot of clients get stuck on pricing and it’s way deeper than that. And where we offer outsourced accounting, I like to sell you on outsourced accounting, but there are situations where having an in-house team really does make sense.

[14:02] Kyle Paxton: In instances where you have high transaction volume and high recurring needs from your team, where you need a team to jump on things daily, having a dedicated person or persons within the accounting team in-house can be really helpful to make sure you’re staying on top of things. When you look at outsourcing, the firm you go with has a handful of clients and is working with you only a portion of the month. There are times where there is a lot of benefit to having someone in-house.

[14:43] Kyle Paxton: If you have a complex setup within your business and complex internal processes, it may make sense to have a dedicated team. In real estate, I don’t see a lot of what I would consider complex internal processes. A lot of this is very repeatable and scalable, which we’ll talk to as a benefit of outsourcing. And if you feel like you have predictable scale and are able to maintain and hire as you grow, that’s another benefit of going the in-house route.

[15:39] Kyle Paxton: Some costs to consider: base salaries, payroll taxes, employee benefits, recruiting fees, training and turnover costs when a key employee leaves, software subscriptions to host the underlying back office software in-house, the management time of providing oversight, and backup coverage if someone departs. Who is doing the CFO and controller oversight functions?

[16:03] Kyle Paxton: This is a big cost and a trajectory I see a lot when folks go the in-house route. I have a lot of clients who say, “I would love to hire a CFO for $60,000.” The reality is you can’t. We struggle to hire accountants and we do it all day. What you end up doing is putting a bookkeeper, nothing wrong with bookkeepers, in a makeshift CFO role, and problems arise there.

[16:52] Kyle Paxton: One other cost I want to talk through is the internal control system. I’m having a conversation with a client currently who’s transitioning family members out of the business. It’s a family office setup, a very tight-knit group with a lot of trust. The family is having conversations about this exiting family member, and they have to hire a third-party individual they’ve never hired before. We’ve been working with them for about six years. We’ve built that trust. They’re comfortable with us managing their books with the internal control system we have. Depending on what your internal control system looks like, you have to put a lot of trust into one or two people, and you have to have the right controls to make sure they’re operating in a trustworthy manner.

[17:54] Daniel Roccanti: In-house accounting works for plenty of companies and there are a lot of pros to it. But what bites a lot of people is when they choose this route, they don’t go 100%. If you’re going to go in-house, you have to commit to it and the price. It really fits when you have a very complex system. The bigger your company, the more properties you have, the more complex it gets. That’s when in-house really makes sense. You need high volume and a dedicated team because you want control.

[19:05] Daniel Roccanti: A lot of times what gets people in trouble is they think they can hire someone for a lot less than what’s needed. When you’re hiring experts in this field, it’s not cheap. What you think a bookkeeper is worth is not what a CPA, CFO or controller is worth. You have to go out and hire someone with a lot of experience, education and knowledge in this area, and that’s not cheap. If you’re going to go in-house, commit. Understand what the true cost is and whether you can justify hiring all these people. It’s going to be expensive, but it might be exactly what you need.

[20:12] Daniel Roccanti: If you’re starting to look at the full price and thinking maybe you don’t need all of this, then you’re moving into the outsourced model. That’s usually what comes up with growing companies where growth has outpaced back office support. We’re growing quickly and need someone to come in immediately with expertise already in place. That’s when outsourcing becomes the answer. You need a quick team to come in and add capacity with the right expertise.

[20:56] Daniel Roccanti: Your reporting needs are probably becoming more complex. You have investors and investor reporting. A lot of times it’s like, I’ve never dealt with this before. I’m a sponsor, I don’t know what this involves, and I can’t go out and hire 10 people who do because that would mean running at a huge loss. Going out and finding an outsourced model with people who specialize in this makes a lot of sense.

[21:33] Daniel Roccanti: In other situations it’s just too lean. A lot of times people hire a bookkeeper thinking that person is going to run a whole accounting department, and quickly realize it doesn’t fit their needs anymore. Uneven growth is a big one too. No one grows in a straight line. Sometimes you need a bigger accounting department and then suddenly you don’t need it as much. You’ve already hired these people on salary and can’t adjust with how your business is going. In real estate, if you own four large properties and sell one, you just sold 25% of your portfolio in one transaction and your needs dropped dramatically. Outsourcing gives you the flexibility to adjust.

[22:35] Kyle Paxton: Flexibility. That’s the word I was waiting for. The flexibility of not being locked into 10 employees. You can work with your outsourced accountant, your needs change, and you adjust just like that. The expertise is already there for you. That’s the biggest thing I see. When you have to go find expertise on your own, it’s costly. Outsourcing is an easier way to get that expertise at a better price, with the flexibility to change as you go instead of being stuck with a whole accounting department no matter where your business is.

[23:42] Kyle Paxton: Flexibility is the key. You have an agile team that can meet you as things come up and offer industry-wide expertise. I work with a large variety of real estate clients of various shapes and sizes. I have a good pulse on what works and what doesn’t work in this back office space. Being able to tap into that industry expertise with an outsourced firm, there’s a ton of benefit there. And that team being able to stay up to date with ever-changing tax laws and planning opportunities and bring that expertise under your umbrella is huge for cash flow purposes and making sure deals pencil out.

[24:27] Kyle Paxton: One more point I want to harp on. If you outsource in the right place, the data infrastructure is there to get data in real time on your business. Using tools like Yardi, where you can implement your full umbrella and everybody involved has visibility, with good audit trail capabilities, really helps give you real-time visibility that goes beyond a bank statement balance.

[24:55] Daniel Roccanti: This is when we talk about back office and getting a better accounting department. Sometimes you’re just not using the right software. You need real estate software that gives you property-level accounting, not just a general business accounting software that was fine at first. When that happens, you now have to hire people who have that expertise. Finding someone who already has it is the easier route until you get to the point where you’re dealing with a complex system and are ready to hire in-house.

[25:46] Daniel Roccanti: Here at James Moore, we really push Yardi. We think it’s one of the more elite real estate and property management software options out there. If your company needs software that can handle your actual real estate needs, you need to find a Yardi expert. With outsourcing, you already have it. You don’t have to worry about someone leaving and no one knowing how to use it. Finding the right software and expertise can really help with your back office accounting and get you to a place where you’re running your company on real numbers, not guesses.

[26:22] Daniel Roccanti: There is a third model we want to touch on quickly: the hybrid model. It’s not all or nothing. A lot of companies choose some kind of hybrid. As your company grows, you’re still going to need some kind of internal support. Someone still has to process things on their side and field questions. As these companies grow, there’s more likely going to be a hybrid model where they still have some kind of CFO or controller instead of hiring out the whole accounting department. They outsource that work but keep some kind of internal management and oversight so they still have some control over the numbers and aren’t fully disconnected from what’s happening.

[28:00] Kyle Paxton: If you have a bookkeeper in-house and outsource the CFO oversight, it adds a lot of trust to your entire process. From my experience, when I call investors and help them understand what their K-1 says, they appreciate that a third party is involved and has their best interests in mind. If you are a real estate fund and you are my client, the success of the fund and the investors as a whole is a big motivation of mine. Having someone who can jump in and communicate that, whether it’s to individual investors, a private equity group, or a bank digging deep into your financials, that extra third-party comfort that someone’s involved who isn’t just under your umbrella adds an extra level of trust in the system as a whole.

[29:17] Daniel Roccanti: Let’s close here. Realize that growth will expose your weaknesses. The last thing you want is your back office limiting your business and your growth. This happens with every company. It’s not a big deal, but you need to understand when the warning signs are there. Is there late reporting? Do you not know what your numbers are? Do you not know what your profitability is? Now it’s time to look into your back office and figure out what you need to do.

[29:48] Daniel Roccanti: Start comparing your models. Should I do it in-house? Should I outsource? Should I try a hybrid, which is very popular, where you still have a little bit in-house but outsource most of the work? The biggest thing is do not let this hurt your investor reporting. That will hurt you the most. You need 100% trust from your investors. Once they lose it, it’s really difficult to gain it back. If you’re seeing a lot of investors complaining or not getting the right information, you need to take immediate action. In the long run, you lose investors, and that limits your growth significantly.

[31:03] Daniel Roccanti: Make sure you’re always asking: are my investors happy? If they’re not, what do they need and how can I fix it as soon as possible? To learn more about James Moore and Company’s real estate accounting and business solutions, go to jmco.com. Don’t forget to subscribe to our Real Estate Industry Update series to receive updates when new videos are released. If you’d like to be a guest or there’s a topic you’d like to see covered on a future episode, contact us through our website or email us at info@jmco.com.

For the full discussion on when outsourced accounting beats hiring in-house and how to build the right back office for your real estate business, watch the complete episode here.

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