5 bookkeeping mistakes property managers make
Property management can be a lucrative business. With impending bumps in inflation rates, along with possible looming changes in the tax code that is leading a last-minute rush of investments into rental properties, apartment conversions, 1031-exchanges, many real estate investors are beefing up their property portfolios for the long-term. This explosion of potential clients for property managers can be exciting. Desperate property owners and exhausted landlords looking for people and services to outsource the management of their real estate.
Some property managers have seen a doubling of their client base and units serviced in the past year alone. But this major increase can also lead to major problems if their bookkeeping and accounting practices are out of order. And often this is the case, leading to manager-client conflicts, and contract reversals. The reasons are simple. Few property managers like the back-end; . . . accounting, bookkeeping, administration. Let’s face it, we all would rather be outside taking on new clients, coffee meetups with partners, doing showings, and growing our business.
These five financial bookkeeping are not only common with property managers, but they are often the source of much pain if not corrected. Correcting and improving these fundamentals are essential for good property management.
Failing to start with an opening bank account balance - This is not only the most common but most damaging bookkeeping mistake long-term. When starting up a property or portfolio of properties, having a correct initial opening balance that matches real-life funds in a bank account is key. If not properly set up, all future bank account reconciliations, as well as assets and liabilities and a balance sheet will always be off. In most property management software, including Buildium, Yardi, Real Page and others, it is labor intensive to go back and make this correction, especially if you already have years of accounting to go through.
Yu Tzu (Angel) Cutler, a bookkeeper for property managers who specializes in Buildium, says that this is the most common issue she sees with her property managers and self-managing owners. They often start using an accounting software, and start entering expenses and rents, without setting up the account properly. When their balance sheet is way off of what their bank is, they desperately search for help.
2. Waiting to do full bookkeeping once-a-year - This seems like the easiest way to do accounting for busy property managers. However, it makes for a living hell when tax time comes, along with a stressful mad rush when a client requests a report more detailed than a simple income statement. Good bookkeeping is performed monthly. All expenses recorded. All income recorded. All other accounts and transactions recorded. The bank account was reconciled.
3. Failing to reconcile bank accounts - Unless your commission model is non-traditional, you likely will have a bank account setup for a client and their portfolio of units. Nearly all accounting software works on the same foundation; record all transactions, and then match all of those transactions with deposits and withdrawals that occur in a real-life account; whether it is a business checking account, credit card account or other. Everything should add up, all money accounted for, and the difference between what was accounted for and what is showing in the bank account should be $0. This basic process should be the foundation of a monthly reconciliation. Without it, assets, the value of the property, and all cash and non-cash accounts could be out-of-order, leading to false reports.
4. Not handling reserves properly - Cash reserves are a good business practice, which involves keeping a certain amount of money saved for a rainy day. Whether it is an emergency, or lease break, or last-minute needed repair, these reserves can help save a property and client, especially if the rental margins are thin. Some state laws even require the keeping of some of it in property management agreements. But many property managers don’t even know what it is for, and how to account for it. This money should not be spent for normal operating expenses, and should be recorded in the chart of accounts as a cash asset. It can either be held at the unit level, property level or portfolio level. Make sure it shows up in your balance sheet.
5. Not understanding liabilities and assets - This basic fundamental of accounting often gets messed up in our industry. A security deposit on hold from a tenant is a liability. It must be refunded upon a successful lease finish of the tenant. Depending on how banking is set up (owner-held, or manager-held), owner draws should be sent after this is all recorded. This is just one example of not understanding proper liabilities and assets.
Another area where this is confused is when recording a mortgage. In fact, setting up a mortgage properly from the beginning will make for an easy monthly owner draws and balance statement reports.
Wouldn’t it be nice if you could immediately print any report your owners want, and you would know that they are accurate and you can justify any transaction they see? Whether it is audits, tax-prep or a year-end statement, having proper accounting can be done if you start by avoiding these five major mistakes.
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About the Author
Mike Cutler is a real estate property manager, student housing and multifamily industry research specialist. He also teaches in the College of Business, at the University of Nevada, Reno. LinkedIn Facebook
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Resources:
https://support.buildium.com/hc/en-us/articles/200820466-Owner-held-security-deposits-When-a-rental-owner-holds-tenant-deposits