Property managers are responsible for managing property management accounting, income, and expenses of owners. Therefore, whether you want to or not, you are always involved in accounting. From receiving rent payments to processing vendor invoices, your business receives a large amount of cash each month. In order to ensure accuracy and efficiency in your property management operations, do you have adequate bookkeeping practices, processes, and property management accounting software in place?
According to Jeana Pondelli, Senior Product Manager at Buildium, “accurate financial data allows you to make better business decisions and inspires trust among your property owners.”
According to her, accurate bookkeeping in property management will assist you in preparing for tax season as well as other financial events, such as monthly owner reports or quarterly board meetings.
A property management accounting company’s liability can be significantly increased by poor accounting practices, according to Brandon Hall of The Real Estate CPA. Your landlord may not be paying you on time, or you may not be accounting for expenses and revenue per client.”
He asserts that obtaining a solid understanding of property management accounting fundamentals ensures that you balance your books. As well as accounting for the money associated with every property you manage.
The following are ten best practices and tips to assist property managers with their bookkeeping:
Setting up a Good Bookkeeping System for Property Management
You should open separate bank accounts for each of your children. There is also a need for a separate security deposit account in addition to your business account. Landlords and property managers often require holding security deposits in separate escrow accounts, allowing them to access the funds when tenants move out.
You should hold your security deposits in a trust if your state permits them. Experts recommended that you should create a separate P&L for each property if you are going to do it correctly. Making informed decisions is easier if you understand your income and expenses per client. The design of a trust accounting system meets the needs of property managers in this manner. As a result, you should be sure that your management fees and the amount owed to the clients are accurate. The failure to do it correctly can leave you open to a lot of liability, and even the possibility of losing your license.”
Create a Chart of Accounts
There are a number of types of charts of accounts, including those that list assets, liabilities, equity, income, and expense items. The application will allow you to organize and label your financial transactions in a systematic manner.
While having these important features is crucial, you can customize your chart of accounts based on your company’s needs. It is possible to maintain a chart of accounts at a high level or at a granular level, according to Pondelli. It all depends on the needs of your organization.
Creating a chart of accounts can be as simple as using an Excel spreadsheet, or it can be easier by upgrading your accounting software. Among others, Buildium automatically generates a chart of accounts with entries tailored to the needs of property managers.
Choose a Method for Accounting for Property Management
There are two main types of accounting: cash accounting and accrual accounting. Cash accounting involves recording incomes and expenditures as they occur. Revenues and expenses are recorded according to accrual accounting, which is a method of recording revenue when it occurs.
It is important that you maintain accurate records of your revenue and expenses as they occur, as most property managers use cash-basis accounting. This is where property management bookkeeping services, or more specifically real estate accounting software, are able to provide assistance. It makes it easier to keep track of all money coming in and going out.
Choosing a Bookkeeping System
In the next step, you need to decide whether you will use single-entry or double-entry accounting. A single-entry system involves the entry of all financial items, both incoming and outgoing, only once. It is not necessarily necessary to have a separate column for each. Essentially, it means that you record all of your records once.
Businesses are more likely to use double-entry bookkeeping. Traditionally, people record transactions twice., once as a debit and once as a credit. As an example, if you were to pay a cleaner’s bill, you would deposit the payment as a debit (or a reduction in your bank account balance) in one account and as a credit (or less money owing to the cleaner) in the other account.
Managing Invoices and Receipts for Property Management
Last but not least, identify a method for managing all invoices and receipts efficiently. In addition to accounting software, there are also property management systems, such as Buildium, which are specifically designed for property managers and reconciling the books of their owners.
Regardless of the method you choose, it is imperative that you maintain a record of all transactions involving money entering and leaving your company. You can also read about their elements.
It will be necessary for you to develop a regular reporting schedule for yourself and your owners after you have completed the above steps. Buildium allows owners to generate and download a number of reports. In any case, it may be beneficial to meet with the owners in order to discuss the figures.
Tips for maintaining profitability in property management bookkeeping
Keep Collections Up to Date
A fee waiver may be necessary at times, especially during a pandemic, when residents or owners are experiencing hardship. It is important to keep your collections up-to-date, however. It is possible for this money to accumulate from month to month and ultimately harm your bottom line.
If you waive any fees, be sure to record them in your property management software and categorize the units or properties accordingly. In addition, ensure that your process adheres to local and state guidelines to avoid placing yourself, your residents, and your owners in a more hazardous situation.
Be Prepared for Unexpected Expenses
There will always be that one expense that you did not anticipate, regardless of how well your collections are doing. Having a rainy-day fund will prevent you from scrambling to cover a last-minute purchase or even losing revenue due to an owner who decides to leave the organization. Analyze your expenses over the past year, especially the unexpected ones, and make sure you have enough money in reserve to cover similar expenses in the coming year.
Maintain a Regular Reconciliation of Accounts
You can identify errors such as typos, duplicate entries, incomplete transactions, and bank errors through a monthly reconciliation. Accurate bookkeeping begins with this step. Performing the process at the end of every month ensures that no money is missing or overpayments have occurred.
Obtaining the right tool to assist you can save you plenty of money in the long run. Since the process can be time-consuming, you may put it off until later.
Using Buildium, you can begin a reconciliation and save your work for later use, according to Pondelli. In this way, you will be able to make progress over time. It will save you a considerable amount of time at the end of each month when you are finalizing your bank reconciliations.
Ensure That The Cash Flow is Positive
Be clear that, You are not necessarily in the black when your cash flow is positive. It is important to note that not all cash expenditures are considered expenses in property management bookkeeping. In property accounting, a refund of a security deposit moves cash but is recorded as a liability. You may record an expensive piece of equipment, computer, or vehicle as a fixed asset on your company’s books..
When a property management company maintains a positive cash flow, they are likely to have a positive cash flow. It is important to keep an eye on this number if your company’s books are kept on an accrual basis.
Take Advantage of Tax Deductions
You will be able to find opportunities to save money by maintaining accurate, up-to-date books. Tax deductions are one method of accomplishing this.
You may be able to deduct the cost of education and training, mileage, and even bookkeeping services. Therefore, several things have changed since the beginning of the pandemic and are likely to continue to change in an effort to stimulate the economy. Make sure that you remain informed of the changes to the tax code that will affect your ability to deduct certain items. Additionally, you should integrate your tax strategy with your business strategy. It is advisable to consult with a qualified CPA and advisor, but you may also find it useful to review Buildium’s Tax Guide for Property Managers for 2022. You can also visit our social media page.
An effective bookkeeping system for property management not only keeps your business profitable but also ensures compliance and reduces liability. The importance of knowledge cannot be overstated-you must also ensure the quality of the data you are collecting is of the highest caliber. In order to stay organized, Pondelli and Hall recommend setting aside a certain amount of time each day.
In Pondelli’s opinion, it is always beneficial to verify new transactions every day for 15, or 20 minutes.
Your property management bookkeeping will provide an accurate picture of your business if you have a firm understanding of the fundamentals, the supporting technology, and the discipline you need.