Why Property Management Accounting Matters
Airbnb, VRBO, vacation rentals, and student rental properties have all become popular means of passive income for the everyday person looking to optimize their secondary properties. And why shouldn’t they? It can be profitable if you know what you’re doing. But it isn’t just a “set it and forget it” kind of process. Property management involves a bit more than signing a contract and collecting rent. So, what exactly is property management accounting?
Property management accounting refers to all of the financial aspects of owning, operating, and managing properties, like those mentioned above. But it’s not just about collecting rent or paying the bills. Property management accounting is about building a sustainable and profitable property. This includes the tracking, analysi,s and reporting of property profits and expenses. If done correctly, property management accounting can offer tax breaks and be a sustainable form of passive income.
Beyond the scope of personal income and financial record keeping, having good property management accounting skills will help keep your properties in compliance with certain IRS and state regulations (which vary state-to-state), improve your relationships with the bank should you need to lend from them, and allows you a way to track and predict growth and scaling.
Core Responsibilities of Property Management Accounting
What does it take to manage a property’s finances, and what are the responsibilities that come with it? For starters, tenants are required to pay rent. As the primary manager for your property, the collection of this rent falls to you. Tracking the expenses, collections, and addressing issues with late and missed payments all fall under this first big responsibility.
As a property manager, you’ll also be required to categorize any property expenses. Repairs, insurance, utilities, maintenance, and property taxes all become your responsibility. However daunting this may be, by tracking your expenses, you have the ability to write them off as tax deductions. If you know what your expenses are, you can accurately report your finances.
Once you have an understanding of the cash flow of your property, you can begin budgeting and forecasting for future profits and expenses. This will allow you to make informed decisions, allocate funds appropriately, and maximize your property’s profitability.
Good property management accounting will provide you with the key financial statements. From these statements, you’ll be able to assess and analyze the performance of your property, monitor any trends that may occur, and gain insight as to where you can improve. They also become fundamental when reporting your taxes, so it’s important to stay on top of your records.
Common Challenges and Mistakes
There are several common mistakes new property managers make when getting into property management accounting. Mixing personal and business expenses is one of the most common mistakes made. Combining personal and business expenses under one account leads to confusion, inaccurate financial reporting, and frustration come tax season. Not only that, but in some states, it may be illegal to have funds produced by your properties pass through a single bank account. To avoid this, it is recommended that you open a business bank account for your properties. Depending on the size of your property management business, you may be interested in opening different accounts such as a property management trust account, a security deposit account, an operating account, and a property management reserve. If you’re not certain what accounts best suit your needs, talk with a financial advisor or book a free consultation with a DeMar Consulting Group consultant today.
Detailed record-keeping will help you avoid the next two common mistakes: mismanaging security deposits and skipping monthly reconciliations. No one wants to be charged incorrectly or given the wrong deposit amount back, and you don’t want the frustrations of having discrepancies between your bank account and records. To avoid both of these common mistakes, always be detailed in your record-keeping. Mark expenses according to what they were for (ie, repairs, home improvement) and keep deposit amounts in their own account so you know where those funds are at all times.
The final mistake that many property managers make is delaying rent collection. Not knowing who owes what at any given point isn’t a sustainable business practice. Having a set date that rent is due and holding tenants to that deadline is key to clear and concise rent collection. Sometimes things happen, and rent gets missed, but you and your tenant need to communicate any issues in order to have them settled in a timely and efficient manner.
Best Practices to Stay Compliant and Organized
So, what can you do to ensure you’re utilizing the best practices for your property management accounting? Firstly, automate payments, rent collections, and deposits with accounting software. Manual input and records leave you vulnerable to error, and if you own more than one property, discrepancies between records and bank account amounts. In that same vein, do monthly bank reconciliations. This ensures that if any discrepancies do occur, you catch them quickly and correct them. Finally, as we discussed earlier, open different bank accounts for your rental properties. This will minimize confusion between personal and business expenses, and more easily help you identify and report any tax deductions come April.
But when is it time to hire a property accountant? There are a few signs to be aware of. If you feel as though you’re spending too much time on the financial aspects of running your properties rather than focusing on your business practices, if you own many properties each with its own needs, or if you feel overwhelmed with the nuances and jargon of financial management, you may want to look into hiring a property manager.
How DeMar Helps:
Of course, there is no “one size fits all” method when it comes to property management accounting. Sometimes, there is a need to outsource. That’s where DeMar Consulting Group comes in. We can handle all your property account management needs. From building a property portfolio and financial plan to follow to risk mitigation and succession planning. Schedule a free 15-minute consultation today to see if outsourcing your property management accounting is the right choice for you.
Property Management Accounting Best Practices
The strongest property management accounting best practices separate owner, tenant, and operating funds; reconcile bank accounts monthly; track security deposits separately; and produce property-level income statements. Clear chart-of-accounts rules, recurring close checklists, and documented approval workflows help managers spot issues before they affect owners or tenants.
