You’re in the property management business to make money for you and your clients. It is one thing to know how to operate a property management business generally, one thing to know how to manage tenants and properties, but it is another matter entirely knowing how to keep your business profitable. One of the most important tasks to achieve this profitability is by maintaining consistently accurate accounting. Follow the ideas in the guideline below to keep your real estate business thriving:
Stay cash flow positive. It doesn’t get any easier than this, or any more important. Make more money than you are spending.
The routine recording of revenues, expenses, liabilities, and receivables will allow your company to track when your tenant and vendor invoices are paid. Which leads to the next point below…
Bookkeeping is simply the organization of financial information. And while you don’t have to be an accountant, as a property manager you do have to maintain accurate financial accounts for yourself and your client’s properties — most states require this by law. It’s the digital age so let good property management accounting software keep you on track and organized.
Here are some other important points to know:
Accrual or Cash Basis. This is the first accounting management decision you’ll need to make based on how you choose to track and report income.
With the accrual accounting method, you record real estate income or outgoings as they happen or are scheduled to happen, regardless of receiving an actual payment or not.
The cash basis is most popular for smaller property managers because money is entered into your books as soon as the transaction is completed.
Journal. To keep financial records, you need a journal. This is where and how you record all of your real estate management companies' day-to-day transactions and is key for proper accounts management.
There are journals for single entry rentals and journals for multiple properties called double-entry bookkeeping.
Your CPA will know better how to use the financial information you record in your journal, your task is to diligently record transactions in it.
Reconcile. One of the single most important tasks of property management accounting is to reconcile your bank account by matching bank statements to your accounts.
Get in the accounting habit of reconciling daily to prevent any inconsistencies from cropping of much later when it may be harder to rectify.
Financial Statements. Also called financial reports, financial statements are one of the products of bookkeeping that give you a clear picture of who, how and where your property management business spends money and makes money on any given day.
You can easily track cash income and outgoings. There are three main financial statements used in accounting: Balance Sheet, Income Statement and Cash Flow Statement.
Receivables/Payables. As a purely bookkeeping function, this is money in and money out, and different to cashflow which is cash actually in your bank account at any given moment.
Receivables/Payables, on the other hand, is money owed to you, like rental income and fees, or in-turn that you owe to others like wages to staff or payments to owners or contractors.
Fee Management. This can be a daunting task, especially if you manage multiple properties for multiple owners, but in accounting, the consistent and accurate tracking of management fees is paramount to your property management companies profitability.
You don’t need to obsess over fees but having an accounting system in place to stay on top of fees will allow you to focus on other aspects of your business.
This is pretty obvious, but if you’re just starting out regardless of your companies legal structure, you need to separate your personal account from your property management account.
Open a dedicated property management business account if you haven’t already, where all income from that property is deposited into that account and all expenses owed for that property come out of this account.
Also, consider opening multiple business accounts for multiple rental properties. This will make accounting much easier to track and manage payments, and expenses into and out of accounts for those multiple properties.
Follow The Rules
As a property manager, you know by now exactly what property management accounting is required of you according to the laws in your state.
The real estate industry is naturally highly regulated, and you may have to provide monthly reconciled bank statements for your state auditing agency.
Keep up to date with the compliance guidelines for property managers and accounting in your state, and use these guidelines as the basis of your property management business practices.
Nobody likes to be kept waiting for money, especially when that money is keeping your property management business alive.
The collection of rent will be spelled out in the lease you use already, but employ sound property management strategies to ensure that prospective and current residents know when, how much and how to pay their rent to you.
And make it a no-brainer for them to pay on-time by using an easy access tenant portal. Remember, it’s all about the cash flow.
No way around it folks, but taxes need to be accounted for and paid. Keeping on top of your books is important for your clients and your property management company.
Seeing as you’re likely filing a tax return for your business, you’ll need to file one for yourself too. As an owner of a property management company, a large portion of your income will come from the business and to know what you earned you must know what your property management company earned first.
And if tax time seems a little daunting, that’s because it is. There is a lot of information and moving parts in accounting for your property management company at tax time, so engage the services of a tax professional and again focus on property management.
You know your business, so stay in your lane and defer to the professionals. Time is money, and spending more time on bookkeeping than the management of owners, renters, staff, and vendors is not very cost-effective.
So, if you don’t already have one, get a CPA. Why? Because they’ll be the ones who can more efficiently deal with issues like a depreciation Form 4562, mortgage interest, lease cancellation costs, taxes on a separate residence, shared residence or seasonal rental.
See? You don’t want to deal with this stuff, but keeping reconciled current books will help immensely when you hand it all over to the accountant which will free you up to get back to doing what you do best.
So, where does this all lead? Well hopefully to a happy and profitable well-run property management business that is fully compliant with state and IRS requirements.
It also means with the use of reporting and professional advice from your CPA you can sit down and look at the strengths and weaknesses of your business.
At some point, you need to take stock and evaluate what works for your property management company and what doesn’t — and plan accordingly. And remember, you can’t fix it if you don’t know it’s broken.
Tax time is fast approaching and if you haven’t already, get a start on your business accounting. Using the ideas in this article should steer you in a good direction to allow you to operate your property management company in an efficient and stress-free manner.