Unlike your typical business accounting, property management accounting involves a variety of factors. In addition to tenant accounts, there have to be accounts for properties as well. Be sure to keep your administrative tasks like payroll and utilities separate from your property management duties.
This comprehensive, multi-part guide will explain property management accounting in an easy-to-understand and straightforward manner.
Each part will include the following:
- Part I: Accounting terms: In this section, we will define the most common and essential accounting terms used in property management.
- In Part II, you’ll learn how to set up your property management accounting. Once you’ve completed Part II, you’ll be able to set up your accounting in whatever property you’re managing.
- Part III: Best practices in property management accounting: In this section, we’ll discuss these best practices and other accounting tips.
- In Part IV, we’ll discuss the rules for executing a 1031 exchange, how the 1031 timeline works, and other 1031 details.
- Part V: How to choose the best property management accounting software: Finally, we review the top property management accounting software.
Take a look at what Answer Tenant can do for you
The property accounting tools offered by Answer Tenant make it easy for property managers to keep track of their company’s financials. Among its features are the ability to pay rent online, track income, and generate professional documents online. With Answer Tenant, you can even manage advanced setups.Additionally, Answer Tenant integrates seamlessly with QuickBooks, so you won’t have to stop using your main solution.
Part I: Accounting Terms
Accounting is a profession.
The profession is something people major in at college, and it is a service that 100% of U.S. citizens need (provided they have an income).
How does that work?
A big, comprehensive topic with a unique lexicon of terms that may be unfamiliar to you unless you have previous business or accounting experience.
It can be time-consuming and difficult to learn even the most basic aspects of business accounting. That’s where this guide begins. To do Real Estate Accounting properly, you should learn the following accounting terms. There is no fluff or unnecessary jargon that you won’t need to know about accounting in property management.
Property management accounting principles you need to know include:
Period of accounting
Accounting periods are periods of time within a financial statement. This can be one or several days, months, or years.
When you run a report in QuickBooks or a similar accounting program to see your revenue and expenses, you’ll see that each report uses an accounting period.
Your business’s accounts payable are the amounts you owe vendors. It is always either a product or a service that you use to run your business, such as the bill for a contractor to fix your property.
The flip side of your accounts payable. This is what you’re currently owed for your services. Here you can find open invoices, unpaid fees, or rent balances.
Method of cash accounting
If you’re paying a bill or receiving a payment from a tenant, cash accounting records the transaction when it’s paid or received. It’s a convenient way for sole proprietors to manage their accounting in the early stages of their business. Accrual accounting, however, is required for all businesses with employees.
Method of accrual accounting
In this method of accounting, businesses must use this accounting method to record transactions based on their date rather than when they send or receive them.
An overview of the general ledger
The general ledger, or G/L, keeps track of all your business transactions. As you input transactions into your basic accounting software, this will likely be generated automatically.
Reconciliation of bank accounts
Ensure that your general ledger (see above) matches the actual statement balance across your business bank accounts on a regular basis (often monthly). Bank reconciliation ensures that’s the case.
Let’s say your bank account is lower than your general ledger. To ensure accurate records, you must identify which transactions weren’t recorded in your general ledger and add them.
A valuable asset
Assets are anything a business owns that has value. In addition to the properties themselves, this can also include cash deposits, land, and receivables.
Amount of revenue
Your business generates revenue over a given period, and this is called revenue. As a landlord (or as a property management company), revenue is when you receive a payment from a tenant.
Expenses encompass the costs of conducting business, including payroll, rent, vendor and contractor payments, marketing, and any other expenditures you incur.
In addition to the actual service you provide, overhead includes all costs associated with running your business. Payroll, office rent, utilities, and insurance, for example.
The essential thing to understand is that credit refers to any transaction that appears on the right side of an asset account. Transactions of this type reduce the asset account.
Any transaction that appears on the left side of an asset account is a debit. An asset account is increased by these transactions.
A measure of an asset’s value over time is depreciation. In the case of construction equipment, its value will depreciate annually depending on a variety of factors. You can often write off depreciation on your annual taxes depending on the item, so you’ll want to keep track of your depreciation numbers.
The equity of a business is its value or ownership interest. Your equity is equal to your assets less your liabilities if you own your business.
Revenue minus cost of goods sold, which is the cost of providing your services, equals gross profit.
A company’s net profit differs from its gross profit in that it doesn’t just subtract the cost of its services; it subtracts all expenses associated with its operation. Overhead (or operating expenses) includes utilities and office rent, two terms we discussed earlier.
There is something a company owes referred to as a liability. Payroll, mortgages, and loans are examples of accounts payable.
The bookkeeping process
A bookkeeper records business transactions that give you your accounting data, which is essentially just business accounting.
There is no one thing that makes up a financial statement. It refers to any report that provides information about a company’s financial health.
- Balance sheets
- Profits and losses
- Income statements
Lenders and auditors usually specify which report they need when they request financial statements from you.
Part II: Creating a Property Management Accounting System
After learning the basics of property accounting, it’s time to put them into practice and set up your accounting system.
Part II covers all the basics of rental property accounting procedures and more, preparing you to get started (or improve a few things if you’re already established).
Part II covers the following topics:
- How to set up a business account
- What accounting method should you choose?
- ·Setting up your chart of accounts (with an example from property management)
- The financial reports are important to know
Let’s begin with the first step. Many property owners make this mistake when starting, and it stems from a lack of understanding of how accounting works.
Step 1: Create a separate business account
Early accounting mistakes include using your personal account for property and other business transactions. According to the IRS, this is a big no-no. Keeping your personal and business accounts separate isn’t the only reason. In addition, it makes it difficult to track your business transactions accurately and wreaks havoc on your accounting. Set up a separate business account to solve this problem.
As a result of doing this:
- This account will receive all property-related income
This account will be used to pay all expenses (or multiple accounts if the rental property accounting is more complex).
Step 2: Decide which accounting method to use
Accounting methods can be divided into two types:
Fortunately, this step is less about choosing an accounting method and more about understanding the differences (more on that in a bit).
The breakdown is as follows:
Cash Basis Accounting
When you receive or send money, whether for services, the sale of a property, or a payment to a contractor, you record the transaction.
In September, if a tenant pays you $1,500 rent for that month, you or your accountant would enter that amount as a rent payment immediately in your accounting program.
Because it’s intuitive, this is the most straightforward method. Transactions are recorded when they occur. Simple as that.
As a result, it tends to be the accounting method of choice for most sole proprietors. Once you have employees on your payroll, however, things change.
Accounting for accruals
Accrual accounting records transactions when they occur.
How does that work?
You record a tenant’s rent payment for the month.
Even if you have the funds in your bank account for several months’ rent, you’d only enter this month’s rent as a transaction.
Next month, you’ll enter the next rent payment.
It’s less about choosing which way (unless you’re a sole proprietor, in which case you can choose) and more about understanding each method if you have employees.
Setting Up Your Chart of Accounts
Now that you have your business accounts and accounting method in place, it’s time to lay the groundwork for your business. The chart of accounts is the foundation of your accounting system. Like your internal bank account, it is organized based on the type of financial activity. The chart of accounts is a list of all the financial accounts used by your business.
The major types of accounts are as follows:
In property management accounting, everything revolves around your chart of accounts. As illustrated in the above image, every transaction is recorded in one of those five categories (with subcategories under each).
As a result of your chart of accounts, you can create reports like your balance sheet, which help you assess your business’s health and future performance. In its simplest form, a chart of accounts is simply a list of your different financial accounts, typically organized by number.
Your accounting system may or may not display the number system.
Desktop version of QuickBooks
Under “NAME” on the left is each subaccount, while under “TYPE” is the master account to which the subaccount belongs. Nevertheless, a number system is needed to organize these subaccounts in the corresponding master account.
Usually, this is done using “block numbering.”
A master account is assigned to a large number, and a section of the number is reserved for that master account’s smaller subaccounts.
A few examples are:
- Assets – 1000
- Residential property – 1100
- Commercial property – 1200
Under each subaccount, you would have further subaccounts:
- Residential – 1100
- The address is 1101 – 326 Labarca Ave.
- 7965 Meron St., Suite 1102
- 900 Bannon Street, #1103
- The 1200 number is for commercial use
- Stellaris 1201
Notice how we have 100 account numbers blocked out for each property type. This account could be much larger, with sub-accounts that organize your individual property accounts by state or city, depending on how many properties you manage.
It is a complex topic that deserves attention. Check out our guide to setting up your chart of accounts: .
An example of a chart of accounts for property management
Without an example, it’s hard to visualize. Here’s a sample chart of accounts from an average property management company. The “Type” column displays the overarching account that each of these subaccounts belongs to, along with its purpose.
Useful financial reports
Getting accustomed to your accounting in real estate system reports is the last step in setting up your property accounting.
Reports are arguably one of your accounting system’s three most important functions (the other two are tracking your finances and preparing your taxes).
Among the many things you can do with your financial reports are:
- Obtaining funding, whether through a loan or investors
- Overspending or wasted funds can be identified by identifying accounting errors
- Identifying areas for improvement in your money management or spending
- Taxes to be filed
These are a few examples of important accounting statements you should know:
- Balance sheet
- Profit and loss statement
- Cash flow statement
- Income statement
Part III: Best Practices
Now that we’ve covered the basics, let’s cover some tips, or best practices, that didn’t fit in the last section. If you are setting up your property management accounting system, or even just interacting with it, keep these best practices in mind. By understanding what your accountant is talking about, you’ll be able to provide more accurate and valuable input when you run reports or review parts of your accounting.
Now let’s get started.
Separate administrative and property management accounts
Property management companies have two levels of business, which makes them unique:
- Service: Managing properties
- Administrative: Managing the business itself
To maintain accurate accounting, these two tasks should be kept separate.
You’ll have trouble doing anything with your accounting if you don’t keep these separate; your reports won’t make sense, whether you’re looking for information about your properties or your business overhead.
Make sure your chart of accounts numbers contains gaps
For your chart of accounts, it’s impossible to predict how many accounts you’ll need over the next decade (and beyond). You’ll end up with a confusing and inconvenient number system if you don’t leave enough space between categories.
Is there a solution?
You should set up your number system by the thousands and hundreds. A master category takes a thousand (4xxx), whereas each subcategory takes a hundred (4xxx, 42xx, 43xx).
Only add accounts when they are needed.
Adding general ledger accounts too liberally is one of the most common accounting mistakes made by business owners or non-certified accountants. You may need to add more accounts from time to time. Over time, your chart of accounts will grow. The last thing you want is dozens of unnecessary accounts (or ones that can be combined into fewer accounts). As a result, your accounting will be simplified and streamlined.
Consult a professional accountant about your annual taxes
It may be that you manage properties alone or with a large team depending on the size of your business.Small businesses may think it’s easier to handle everything themselves rather than hire an accountant. It’s just a little extra savings.A professional should handle your taxes when it comes to business accounting, especially property accounting. Paying a small fee to a local accountant who will review and sign off on your books could have easily avoided a painful audit.
Review your financials annually (at least)
Reviewing your financials each year to assess changes and identify areas for improvement is important. This becomes even more important when you consider the fluctuating value of properties. Each year, you should examine your financials at every level, just as you might review your goals for the business.
Identify unnecessary accounts, double-check accuracy, look for overspending, and use the data to inform your next steps. Preparing a cash flow statement is the best way to do so.
Cash flow statements grade properties based on four metrics to determine how profitable they will be in the future:
- Rental cash flow: A primary source of cash flow is rent payments
- Capital appreciation: An increase in property value
- Debt paydown: The property’s rate of payment is decreasing.
- Tax shelter: All tax deductions utilized
A professional can perform this kind of cash flow statement for you if you’ve never done one before.
Save time and effort by using accounting software
An Excel spreadsheet can still be used to manage your accounting. Nowadays, software is a much more efficient way to manage your accounting than a spreadsheet. Accounting software, preferably dedicated property management software, allows you to automate many processes that would take hours to complete manually each month.
Plus, with property management-specific accounting software, you get access to features that typical accounting software can’t give you. The features depend on the software, but they often include a tenant portal, automated rent payments, and a work order management system.
Keep track of deductible expenses
Tracking expenses for accurate tax reporting is a big part of accounting. Keeping track of your deductible expenses is critical to reducing your tax bill at the end of the year. It is possible to deduct dozens of expenses associated with rental property management.
Here’s a list:
- Legal fees
- Management fees
- Real estate taxes
- Lease cancelation fees
- Repair costs
- Supply and equipment costs (even if you just rent said equipment)
- Travel, specifically mileage between properties for any type of work-related tasks
- Mortgage interest payments
- Your annual tax preparation payment (from the previous year)
- Maintenance payments to contractors
Create a system for tracking NNN leases (if applicable)
The point applies only to commercial real estate, where many leases are triple net or NNN leases. You’ll need to track everyday area expenses and bill tenants annually if you use NNN leases. This process is mostly automated with accounting software, which allows you to set reminders and multiple accounts.
However, it is easy to forget and lose track of, which can cause havoc with your accounting. You should therefore set up a system for managing it in a proactive manner.
Part IV: Exchanges under 1031
Property management accounting is incomplete without IRS 1031 exchanges, especially when it comes to taxation.
Capital gains tax can be deferred when you exchange investment properties using a 1031 exchange. It is, however, what you can do with that tax deferral that leads to the true benefits of a 1031 exchange:
- Shifting properties to put a stake in a developing area: To maximize returns: If your property is stagnant, you can change its value to another in a promising area.
- Avoiding the downside of market volatility: Exchange properties when you anticipate a big market change, shifting from higher-risk properties to lower-risk ones.
If you don’t know what you’re doing, 1031 exchanges can be complex and If you do not follow the rules, you may lose your tax deferral status and be subject to capital gains tax.
Let’s quickly discuss the 1031 exchange rules and timeline. Interested in learning more about 1031 exchanges, including the rules and types of 1031 exchanges?
Property must be like-kind
An exchange of like-kind property means you must buy a similar property to the one you’re selling. The rules for what this means is a bit vague, so much so that most two of any properties are considered like-kind.
Taxpayer must be the same
The entity that sells the property and the person who buys the new property in the exchange must be the same taxpayer, whether it’s a corporation or an individual.
Property must be an investment or business property
Personal property cannot be exchanged in a 1031 exchange. Section 1031 no longer applies to exchanges of personal or intangible property under the Tax Cuts and Jobs Act.
Have equal or greater value
Your exchange must be of equal or greater value than the property you’re exchanging for. Capital gains will be due if it isn’t.
Timeline of the 1031 exchange
How a 1031 exchange is conducted is dictated by the 1031 exchange timeline. In order to maintain the 1031 exchange status, you must adhere to the timeline from beginning to end, especially during the 45-day and 180-day markers.
To better understand the 1031 exchange timeline, here’s a 10,000 view. During the timeline, here’s a quick summary of important points:
- On the first day: Ensure the exchanged property is sold by a qualified intermediary.
- The 45th day : Select three potential replacement properties by this date, one of which will be the exchange property.
- 180th day: The last day of the exchange period. As of this date, you must have selected your exchange property and completed the exchange process.
- Here is a comprehensive guide to the 1031 exchange timeline, including tips for making it go smoothly at every stage.
Part V: How to Choose the Best Property Management Accounting Software
The information you have learned so far will assist you in addressing your accounting in real estate in a way that both reduces time and increases profits for you and/or your clients. Nowadays, however, if you don’t use accounting software, you’re doing yourself a great disservice.
Accounting software automates much of what was once repetitive manual input work and enables new capabilities.
A decent accounting solution can track deposits, record rent payments, handle payroll, and issue invoices to vendors and contractors. You’ll need quality accounting software even if you have an outside accountant.
Is QuickBooks all I need?
The limitations will quickly become apparent if you manage dozens of properties yourself or are part of a property management team that manages a large number of properties.
When using QuickBooks, it is difficult to manage multiple accounts, such as property management, business management, and deposits.
What is the solution?
Property management accounting software offers much more than just robust accounting capabilities.
In addition, you get the following features:
- An owner portal where owners can review key reports and make payments
- A tenant portal where you can communicate with each other
- Tools for marketing, such as automatic listing and templates
- Management systems for maintenance orders that automate much of the process
What is the best property management software?
Depending on whether you manage rentals, commercial, HOAs/condos, or other types of properties, we’ll discuss the best property management software.
Software for managing commercial properties
The features of commercial property management are typically designed for large-scale property management firms. You should consider these options if you strictly manage commercial properties.
Commercials on RealPage
There are many features in RealPage Commercial, a robust property management software for commercial properties. Due to its square-footage pricing model rather than per unit, RealPage Commercial can either be affordable or a bit pricey depending on how many units you have.
Management as a whole
Known for its easy setup and intuitive interface, Total Management offers a commercial-specific solution. In addition, Total Management can handle both residential and commercial properties. Nevertheless, its price is higher than that of its average competitors.
You can try Total Management if you’re looking for commercial property accounting software that’s easy to use and has the budget to spend.
Commercial Management at MRI
We also offer MRI Commercial Management, a robust accounting solution for commercial properties. Similarly to Total Management, it has enterprise pricing, which might deter many from trying it. When you have a high budget and need strong leasing tools, consider MRI Commercial.
Software for condo property management accounting
Property management accounting software for condos is perhaps the most unique. This is largely due to the community-centric nature of HOAs and their needs. You can expect some kind of community management feature as well as some or most of the standard property management features with these options.
For small associations, Wild Apricot is a dedicated HOA management software. Although it has a good balance of features, it lacks some essential ones such as work order management and calendar management.
A pay-per-view agreement
Dedicated to HOA management, PayHOA offers a wide range of features and notable customer support. Mobile functionality is not available, however, For a strong support team without a mobile app, try PayHOA.
Control of condominiums
Lastly, Condo Control provides a good balance of features geared toward condo, co-op, and HOA managers. Interested in a solution that offers good community management features without sacrificing any of the great property management accounting features mentioned earlier? Try Condo Control.
Consider using a property management accounting program
Setting up your property management accounting involves a lot of work. The goal of this guide is to help you take the first (or next) step in the right direction.
Are you looking for a partner who can make your accounting – and all property management operations, for that matter – run more smoothly and stress-free? Bring ease and efficiency to your property management accounting with a property management outsourcing company.
In addition to these features, Answer Tenant offers a full suite of accounting tools that allow you to track, manage, receive, and pay everything from one dashboard:
Access a comprehensive chart of accounts and robust reporting capabilities
- Prepare vendor and owner checks
- Automatically receive rent each month
- Consolidate bank accounts
- Quickly integrate QuickBooks Online
Q. Can Real Estate Accounting is done by property managers?
The property manager is responsible for Real Estate Accounting and must have some accounting knowledge.
Q. How difficult is property management accounting?
Accounting for property management can be challenging and time-consuming, but software like Answer Tenant makes it simple and even integrates with Quickbooks. You may also visit at Answer Tenant social media page for more informative information and interesting posts.