Managing debt well is a crucial aspect of commercial real estate.
When leveraged properly, loans can help you grow your business and improve your properties. But if neglected, they can have dangerously expensive consequences. How a business handles its debt can be the difference between struggle and success.
In this article, we’ll discuss major debt management strategies for commercial real estate businesses. We’ll also take a look at how to use software to streamline the process, including the uses and limitations of QuickBooks and other tools that fill in the gaps.
What is Debt Management in Commercial Real Estate?
Debt management in commercial real estate means tracking loans owed, payment schedules, conditions, and your financial performance and ability to pay. Because each loan will look slightly different, management can get complicated fast, meaning that it’s crucial to have a system in place to keep track of all the important information you might need.
Key Debt Management Strategies
Debt management can be challenging, especially as your portfolio grows and becomes more complex. But with the right strategies, your loans can work for you. Let’s dive into some of the most important aspects of good debt management for a commercial real estate business.
Understand Loan Terms
Before taking on a loan, it’s best to thoroughly review the terms. Make sure to note payment due dates, interest rates, and any other conditions you must follow. Consult with your financial team to decide if the loan is a good fit for your capabilities and goals. Then, store the loan terms in an organized, easily accessible location so you can review and reference them easily.
A clear review of terms helps you maintain compliance and avoid expensive mistakes later. It also allows you to ask questions about or even negotiate parts of the loan with the lender if you are unsure about them.
Regularly Analyze Business Performance
Understanding your ability to pay back loans requires understanding your business performance. Regularly review performance metrics like debt service coverage ratio (DCR), which describes how easily you can afford to pay back debt, net operating income (NOI), and cap rate.
Knowing these metrics helps you decide which loans are helpful and which might put too much strain on your business to repay. You will also be able to spot performance issues that could compromise your ability to comply with loan terms before they become big problems.
Use Debt Tracking Tools
One way to keep track of your debt obligations and repayment progress is by using programs designed to easily store and display this information for you. This way, you never have to go searching for what you owe and can spot potential issues early. One place to find debt-tracking tools is property management software, which may also let you store loan terms and create investor reports.
Can You Manage Debt in QuickBooks?
While you can track debt in QuickBooks, it has some limitations. As a top accounting choice for small and mid-sized commercial real estate businesses, QuickBooks is an excellent way to handle your general financial needs. You can create entries in QuickBooks for debt obligations, but it may not be the best way.
QuickBooks is not built to handle commercial real estate needs specifically, meaning that you will often have to create custom workarounds to properly enter things like rent and real estate debt obligations. For instance, owners need to monitor if they are in violation of certain loan covenants, such as occupancy rates, falling below a certain DCR, or reaching a dangerously high loan-to-value (LTV) ratio.
Instead, you may need to look for software designed with commercial real estate and debt tracking in mind.
Sharing Reports with Lenders
Maintaining positive relationships with lenders generally means sharing debt summary reports on a regular basis. Lenders may require these reports on an annual or quarterly basis, and it’s important to be thorough and clear. However, these documents can be extremely time-consuming to create. This is especially true for businesses that rely on spreadsheets to keep track of key debt information. Irregularly updated and maintained spreadsheets lead to drawn-out searches for the data you actually need, and are prone to manual-entry errors.
Best Software for Commercial Real Estate Debt Management
For the best overall debt management solution, try integrated commercial property management software. Programs like STRATAFOLIO sync automatically with QuickBooks Desktop and Online, allowing you to perform all your accounting in QuickBooks while taking advantage of commercial real estate-specific tools. Track debt obligations, analyze portfolio performance, and create lender reports all in one place to turn debt management into a hassle-free process for your business.