Managing rental properties full-time involves much more than simply collecting the rent and fixing the occasional broken toilet. Accounting for property management is one of those tedious tasks that are absolutely critical to successfully running a property management company.
There are some bookkeeping basics that must be mastered if you want the management of your rental properties to flourish and succeed.
Why Property Management Accounting Is Important
Just as there are two sides to every coin, so there are two sides to property management bookkeeping – the client and the business. The property owner, or client, wants their property to cash flow.
The more profit you can show on their books, the more likely they will keep you as their property manager. Accurate and careful bookkeeping is the foundation of cash flow.
The second reason why accounting for property managers is important is that you are also working on running a profitable business. Your income will be based on collecting the rent – which requires accurate records. Collecting reimbursed expenses also requires careful expense tracking.
Time is money. Each month, quarter and year-end a property management company will provide their clients with financial reports. Those reports need to be accurate. An efficient property management bookkeeping system will save time and make this task much easier.
Property Management Accounting Basics
As we mentioned before, there are some property management accounting basics that must be mastered if you want your property management company to succeed. Here are a few critical elements:
Keep Escrow Accounts Separate
Every tenant is required to pay a security deposit. This deposit cannot be used to manage the property. The monies must be set aside. A separate escrow account should hold all security deposits, last month’s rent, and any prepaid expenses. The local real estate commission or state agency will have specific guidelines that need to be followed.
Follow the Budget
Really good property management companies will sit down with their clients and set up a budget. This will spell out a monthly average for maintenance and repair expenses. It will place a cap on repairs that can be completed without the owner’s prior approval. This budget is the property manager’s Bible.
Your client is expecting you to meet or exceed the monthly and annual net operating income. Careful property accounting is necessary to keep each client account on budget.
Keep a Positive Cash Flow
A positive cash flow and the budget sort of go hand-in-hand. Remember how we said that bookkeeping has two sides? Well, besides making sure that your client always has a positive cash flow, good property management accounting must also make sure that your business is seeing a positive cash flow.
Effective property management requires staff and subcontractors. Without careful accounting, these expenses can quickly exceed the income coming in. Office supplies, new technology, and advertising expenses can add up quickly. A good bookkeeping system with checks and balances will help keep this from getting out of hand.
Use a Software System
While Microsoft Excel can be programmed to track all of your income and expenses, good property accounting starts with software that is specifically designed for this field. Do not take shortcuts here.
Let’s be honest, property record keeping is no fun. It is boring and tedious. It will get even worse without professional property management software.
Your property management software should encompass the whole management process from tenant records, maintenance requests, client correspondence as well as daily bookkeeping and end-of-year financial reporting.
There are many different software companies out there that offer a variety of products. Here are some of our recommendations:
- Yardi. A great software package that streamlines marketing, leasing, tenant screening, rent collection, and accounting. Allows tenants to pay online and submit maintenance requests.
- Rent Manager. A software package that can handle any sized portfolio that integrates accounting, VoIP, online tenant portals, screening and electronic payments.
- Propertyware. The new leader in property management software. Collect rent online, track work orders and maintenance issues. Online records management, accounting, tenant screening, letter templates. Can sync with QuickBooks.
- Appfolio. A cloud-based software system that accepts and sends out electronic payments. Offers easy vacancy posting, website hosting, online maintenance requests, applications and lease signing and even in-app texting.
The Property Management Accounting System
Just having the industry’s best management software will not immediately guarantee that you will have accurate bookkeeping records. A good property management company will setup an accounting system that will help their clients take advantage of tax write-offs while keeping the records consistent.
Create a Chart of Accounts
One of the critical first steps is to create an initial chart of accounts. The chart of accounts should be the same for each of your clients. It can be helpful to establish a written set of guidelines that explain the purpose for each account.
Correctly Classify Expenses
Many investors and new property management companies make the common mistake of misclassifying expenses. Knowing what is a repair or maintenance expense and what is a capital improvement will impact the taxes that are paid by your client. It will also affect their property value when it comes time to sell or refinance.
You know how we talked about the tedium of bookkeeping? Well, I believe that those monthly bank statement reconciliations take the cake on that one. Bank reconciliations are often rushed through, swept under the rug, or ignored completely.
This should not happen. Bank statement reconciliation will help the property manager find duplicates, missing entries, incorrect entries and bank errors. Things that if left unchecked could take hours and hours to track down later.
Good Property Management Companies are Good Recordkeepers
Good bookkeeping goes hand in hand with top-notch property management. Investment property ownership is all about cash flow. Positive cash flow is all about accurate bookkeeping and careful financial management.
If you are deciding to hire a property management company, ask them to explain their bookkeeping system to you. Now that you know the bookkeeping basics for property managers, you will be able to identify the companies that are as concerned about cash flow and finances as you are.