Property management accounting and bookkeeping are not for the faint of heart. By trade, property managers are expected to keep track of an owner’s real estate income, assets, and expenses and implement accounting methods that help ensure healthy business growth and profitability. This means that the processes and tools that are used to bolster accounting efforts are critical to any good property management team’s success. That’s no small feat, but we’re here to help.
Here are the accounting best practices that will help transform your property management business into a lean, mean, profit-building machine.
A critical step of any good, clean property management accounting strategy is setting up a chart of accounts. A chart of accounts is a clear and detailed list of all assets, liabilities, equity, revenues, and expenses that a property owner tracks. A good chart will allow you to keep your transactions organized and have all relevant accounting information available to you in one place.
These charts pave the way for:
Clear and simple visibility into new and pending transactions
Understanding exactly what an owner owes
All the information you’ll need to file taxes in one place
A smart and easy way to share information with bankers, accountants, etc.
To create your chart, you can either go with a simple Excel spreadsheet, or use a PMS solution or an accounting software to automate the process for you. If you opt to do it yourself, follow these steps.
Step one: Create general ledger accounts (i.e. Assets, Liabilities, Revenue, Equity, and Expenses).
Step two: Create account subcategories that reflect common transactions, and organize them so that they correspond with a relevant general ledger account (i.e. Rent payments would fall under Assets).
Step three: Assign account numbers to each account subcategory. Create a numbering system that helps organize transactions. For example, all transactions that belong under Assets are assigned a number between 1000 and 1999, all “Liabilities” should get a number between 2000 and 2999, etc.
Step four: Organize all past and present transactions accordingly.
View these sample charts to see how it’s done.
It probably won’t come as a surprise that you’ll have to open separate bank accounts to smartly house and manage your finances. These accounts include:
A business account for the operation of your property management company
An escrow account for all security deposit funds
Separate accounts for all clients/owners you service
Not only will this approach make it easier for you to automate processes in the long run, but this also will make your property management accounting simpler and easier to follow. Keeping your business account separate from your clients ensures that all of your financial statements accurately reflect what your income and liabilities are versus theirs.
Creating escrow accounts for security deposit funds are standard practice. However, calculating interest payments and managing withdrawals from these accounts can be an administrative headache. You can set up these accounts, but then also use a tool like Rhino to reduce the administrative strain of managing them. Owners who use Rhino are able to replace cash deposits with insurance policies that protect their properties, accelerate leasing, and widen their applicant pool by lowering move-in costs.
As a property manager, it’s up to you to choose the bookkeeping and accounting methods that are right for your team. There are two property management accounting methods that you can use to record information in your books:
Cash accounting: This method calls on property managers to log every new payment or income as soon as cash is either paid or received for a rental property. In other words, as soon as a rent payment is made, or a maintenance worker is paid, the information gets recorded in your books.
Accrual accounting: This method calls on property managers to log every new payment or income as soon as cash becomes due or owed. In this instance, if a renter is a little late on their rent payment, you’d still log that income on the date it was owed. And you’d log a maintenance worker’s fee as an expense as soon as you’ve been billed for it (even if you haven’t paid them yet).
The best way to choose your property management accounting method is to think about how you’d like to see your records. Many enjoy cash accounting because of its simplicity — changes aren’t made unless cash comes in or out of an account. But the benefit of accrual accounting is that it’s easier to earmark cash for future expenses, allowing you to spend with them in mind.
There are two bookkeeping methods that you can use to record your transactions:
Single-entry bookkeeping: This method calls for all financial items, incoming and outgoing, to just be entered once.
Double-entry bookkeeping: This method calls for every financial item to be entered twice. The first entry should be a debit, and the second should be a credit.
Many property managers choose to use double-entry bookkeeping because it’s a clearer way of keeping track of items across accounts. For example, with double-entry bookkeeping, paying a maintenance worker would involve entering the payment as a debit (cash removed from your Expenses account) and then entering it as a credit (less money owed to maintenance employees) in your Liabilities account.
Pro-tip: Whatever method you choose, just be sure to keep a record of all statements that detail money going into and out of your business.
Once you have the right accounting systems in place, it’ll be time to invest in property management accounting software. The right property management accounting software will streamline accounting work to give you more time to focus on the items that will keep your entities cash flow positive.
Many property management accounting software solutions sync directly with existing bank accounts and your chart of accounts to automate manual accounting and bookkeeping processes. This functionality means that you won’t have to worry about downloading CSV files from your credit card or entering new items manually. Your software’s built-in financial reports will be automatically refreshed to reflect your latest data. That means that with the click of a button, you should be able to download a fully up-to-date P&L statement (income statement), balance sheet, cash flow statement, and more.
You should also have the ability to manage accounts payable and accounts receivable through your automated accounting solution. The right accounting software will allow you to:
Create one-time and recurring bills for monthly expenses.
Automatically receive and post charges for online payments, rent, late fees, management fees, storage, parking, and more.
Deliver accounts receivable notices via email, text, phone, etc., based on your predetermined schedule and protocol.
Track and manage vendor information and vendor-specific transactions.
There are several property management accounting factors that contribute to an owner’s bottom-line success. These factors include:
Rental cash flow: This is actual cash from rental income that ends up in an owner’s pocket each year after expenses. You’ll be able to keep track of this in a Cash Flow Statement. Keep collections current to ensure that you don’t fall behind on cash flow goals.
Expenses: It’s part of every property manager’s core responsibility to maintain and/or reduce expenses. This includes vendor fees, maintenance fees, energy consumption, and more. Solid tracking of this will keep you in the black, and surface potential opportunities for growth.
Tax deductions: If you keep an eye out for tax deductions, like the cost of training, mileage, and bookkeeping services, you’ll encounter more ways to save owners money in the end. Stay up-to-date on what your local tax code will allow you to deduct. Check out Buildium’s 2020 Tax Guide for Property Managers for more information.
Pro-tip: Keep a rainy-day fund to cover any unexpected or last-minute expenses; this will help you stay prepared for anything that comes your way.
A bank reconciliation is a process by which you compare the transactions that have cleared the bank to those in your property management accounting system. It’s essentially the business equivalent to balancing your checkbook.
By performing regular reconciliations, you’ll be able to stay on top of any inaccuracies in your reporting or errors in your bookkeeping or accounting methods. In your reconciliations, you should be looking for:
A property management team that commits to good accounting practices will be making their jobs less stressful, and more productive, in the long run. These property management accounting practices are crucial for any property manager looking to streamline their processes and elevate what’s possible for their properties. Follow these steps to a tee, and watch your team reach new levels of efficiency, effectiveness, and cash flow success.