Three Basics for Better Property Management Bookkeeping
Whether it's a beachfront vacation rental on Airbnb, a condo in a community association, or a long-term lease on an apartment in the city, most U.S. citizens have lived in a dwelling managed by a landlord or property management company. In fact, 43% of single-family residents rented their accommodation in 2017, and approximately 69 million residents live in a community association.
But before you list your empty mother-in-law suite on Airbnb or make a career change, there are some important things to know about the business, especially when it comes to the bookkeeping.
Here are three basics to know about property management accounting:
Know the rules
Review your books at least once a month
Use accounting software suitable for your business needs
1. Know the rules
There are federal and state regulations that every property manager must follow. In addition to strict adherence to federal anti-discrimination laws like the Fair Housing Act, property managers often must meet state licensing regulations to engage in certain duties. Usually, this includes anything that involves the conveyance of a contract or lease, like showing a unit for sale or lease, negotiating lease or real estate contract terms, maintaining security deposits, rent or association dues payments, or earnest money deposits.
When it comes to playing by the rules, keep these two things in mind:
1. Know what licenses you need to operate legally
2. Know what you’re required to disclose to tenants and owners
Depending on your state, you’ll most likely be required to attain either a Real Estate Broker’s License, Property Management License, or Community Association Management License.
There may be additional licenses that are required of companies that engage in real estate leasing activities.
Certain types of lodging and how it’s used may also require additional licensing. For instance, in Florida, all vacation rentals must be licensed through the Department of Business and Professional Regulation (DBPR). A Vacation Rental is defined as “any unit or group of units in a condominium or cooperative or any individually or collectively owned single-family, two-family, or four-family house or dwelling unit that is also a transient public lodging establishment but that is not a timeshare project.”
Hosted Rentals (short-term rentals where the host remains in the home) are not regulated by DBPR.
Should a tenant break a lease or damage property, some state landlord/tenant laws require an itemized list of expenses and charges to the security deposits or required repair bills that the tenant must pay. Other states only require that the amount being withheld is disclosed by job and not a comprehensive outline of all the labor and materials.
For community associations, there are also Covenants, Conditions & Restrictions (CC&Rs) that are set up by either a developer or homeowners’ association. While many people may see these rules as impositions only the residents must adhere to, there are also stipulations regarding the collection of dues or code violations for the association. Failure to enforce the rules found in the CC&R could result in their nullification. As a result, many associations will implement a Resale Inspection Rule in order to find and issue code violations when a property is listed for sale.
Property managers will want to make sure they are closely monitoring their unit owners' listing activity and that all the required disclosures with the correct financial information are delivered to the buyer. The resale certificate or association estoppel is a binding legal document. Many states regulate what must be listed in these documents and limit if and when an association can issue a corrected certificate or estoppel.
So, be sure you are complying with your state and local laws as well as any community association rules to avoid any hefty fines that will put you out of business. If you decide to hire a property manager to manage your property or association, check that they are licensed appropriately within the state.
2. Review your books at least once a month
Good bookkeeping relies on a steady foundation of good organization. Property management income, which includes regular management fees and collecting late fees or violation fees, is typically slow and steady. Expenses that are unexpected can be mitigated by properly monitoring your monthly budget, profit, and reserve funds.
Review a company income statement every month to make sure you are earning a profit.
Some behaviors of organized property managers include:
Maintaining accessibility of clear and concise documents. Tenants and homeowners have the ability to challenge charges against them if they believe they are unfair. Having a document management system to easily access information is imperative to demonstrate that you and your company are abiding by state, federal, and community regulations.
Separating every property. In addition to an overall budget, every property or unit needs to have its own budget line, so that you can accurately track profit and loss.
Having written procedures and enforcing them. Whether it’s evictions or sending someone to collections, you should have clear procedures in place to deal with these issues that align with federal and state regulations. Showing favoritism toward one household may be a recipe for a discrimination lawsuit.
Keeping your collections current. Because property managers are responsible for paying their clients’ expenses from maintenance bills to management fees, you’re in a unique position to pay yourself as soon as the rent or homeowners’ dues come in. Setting up a regular schedule to collect your management fees will sustain a healthy business.
Reconciling your bank account. In some states, monthly bank reconciliations are a part of staying compliant for auditing proposes, but bank reconciliations are a necessary part of any business with healthy accounting practices. This helps you to find duplicates, missing entries, typos, and bank errors.
Staying cash-flow positive. This is obvious, but cash flow in property management bookkeeping isn’t always so simple since every cash expenditure isn’t an expense. For instance, a security deposit refund spends cash but uses a liability account.
Unlike other small businesses that use “cash basis” accounting methods, property management is better suited for accrual basis accounting. This means that revenues are recognized on the income statement when they are earned instead of when cash is simply received. As a result, this number is going to vary from month to month and requires close monitoring on a regular basis.
3. Use accounting software suitable to your business needs
There is specialized accounting software available to property managers like Buildium, AppFolio, and Avail. Many of them come with additional tools built specifically to optimize the workflow of a property manager like tenant screening tools, maintenance ticket tracking, e-signature captures for lease documents, and marketing and website management tools.
Traditional accounting software like Quickbooks also works well, but it's not ready to go out of the box, and setting it up can be complicated. You’ll want to check out these tips to make Quickbooks set up easier for rental and property management. This will depend on if you manage short-term or long-term rentals in a real estate investment portfolio or if you manage a community association.
For property managers, the software you pick should have at least these capabilities:
Accounts Receivable and Accounts Payable
Some programs, like FreshBooks, are designed specifically for invoicing customers and tracking expenses, so this program won’t be suitable for managing real estate.
If you’re looking for a low-cost or free accounting solution for real estate management, spreadsheets, OpenOffice or Google, are also an option, and many can be used integrated with other tools to create reports for your clients or other stakeholders, but they aren’t as easy to use.
Each accounting program is different, so be sure to either consult your accountant before making the switch or do your research before buying. Fortunately, many have free trials you can do before you commit.
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