Welcome to the Narplum Podcast. We discuss hot topics with property managers, vendors, and those supporting the property management industry. The National Association of Residential Property Managers is the recognized leader in property management. Now here’s your host, Pete Newbig. Welcome to the Norpom podcast.

I’m your host, Pete Newbig. And, today, we have Moe Hussain, who is the CEO and founder of Balanced Asset Solutions. Moe worked at Appfolio, Yorey and Google before starting Balanced Asset Solutions. They’re not your average CPA. They help PMs thrive with expert support in finance, accounting, operations, and technology.

And if you are interested in learning about books, setting up the accounting, this one here is for my accounting folks out there. So, be excited about this one. And, let’s get on to our topic before we get with Moe. So I know I’ve been doing a little bit, each week on, on my presentation, how to, you know, how to make an offer so good people feel stupid saying no. But I’m gonna deviate this one week because we got the accounting team on.

And I wanna talk a little bit about an that I had a while back, that I’m sure most of you know, but, I’m gonna, you know, maybe somebody’s out there is like, oh, didn’t realize that. Alright. So, I’m gonna talk about owner distribution versus salary. Now when I started empire, Steve and I were fifty fifty partners, Steve Rosenberg and myself, we’re fifty fifty partners. And we didn’t understand like that.

You know, you get a salary and you own a distribution, especially when there is no distribution to be had in the company, especially early on. Right? There’s not a lot of profit, so there’s no distribution. And Steve and I were both working in the industry in the business. But I was working more hours.

You know, I had I was the CEO. And Steve was was like sales. And then eventually, Steve kind of graduated. And he was literally not really working in the in the business anymore. But we were drawing the same salary.

And what we realized is what we were doing was we were taking distributions of what the company can pay us. And that was really when we were using that as our salary. And what I learned after reading, I read this, this book, and it’s by Michael Crabtree. And it’s like simple numbers, something or other. But if you do grab Crabtree and simple numbers, you’ll find a book.

And one of the things he says is, you need to pay yourself a salary for the position that you’re working in. And it should be equal to what is out there in the market. So for example, if you’re CEO of a of a $2,000,000 business, and you’re paying yourself $60,000 a year because there’s no profit in the company, or the company can’t afford it, that’s not, that that’s not the right that’s not the market for a CEO of a $2,000,000 company, if that makes sense. And what he says is if you’re not paying yourself, the market rate, then you’re not making any money if you can’t afford to pay yourself market rate. Because if you left or if you elevated, you’d have to hire somebody, and you’d have to pay them what’s in the market.

And, so this took this took me a really long time to figure that out, because I was paying myself a distribution. We were an LLC as a partnership, I believe. So we were not an s corp. If you’re an s corp, you know, one of the things that you really should be doing is if you’re an s corp is paying yourself a fair market wage. IRS will look, they won’t look too kindly at you if you’re paying yourself, you know, dollars 30,000 a year and you’re CEO of a million of a $2,000,000 company.

And then, so you pay the people first. Right? So you pay your yourself first as a as a team member. And then when you have profit left over, that is when the owners if especially if they’re not involved in the business, they will make a salary. Right?

So if if you sit there and you have four owners and two of you guys are going to be working in a business and two of you are not, then the two that are not should not be making any salary in the business or or distributions until the two that are working in the business receive regular receive market market based compensation. Then after that, you can then put together, okay, what the distribution is going to look like. And mainly, what you do first is, is you pay yourselves market rate. Right? So so now I’m paying everybody market rate.

Now we have a little bit left over. Great. Now what you do is you save for taxes, and then you can make a distribution to the partnership so that it covers the taxes. And then once you cover that, then you should have, you know, one to two months of expenses filled out or, you know, set aside. And then you can start making those distributions to, to the partnership.

So that’s kind of, again, it’s all laid out in Michael Crabtree’s book, simple numbers and something or other. And I always forget it. But if you do that with a quick commercial break, we got this, great interview with Moe, and, he’s gonna break down all the accounting stuff for us. Be right back. Tired of wasting hours stuck in traffic running between your properties?

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Learn more at our website, yourris.com. That’s y0urris.com. Renters Insurance Solutions, your experts in property management and insurance. Welcome back everybody to the Norbom Radio podcast. As promised, Moe Hussain here, founder of Balanced Asset Solutions.

Moe, thanks so much for being here, buddy. Hey, Pete. Happy to be here. Alright. So, I actually asked you guys to, to come on, ask Balanced Asset Solutions to come on because there’s, there’s a lot of, you know, challenges when when setting up, your your accounting systems, and, a lot of people don’t, you know, a lot of people don’t know that you can’t, you know, you can’t, you know, mix funds and all that good stuff.

So, but just kind of talk to me about, like, how to get your accounting in order. Like, you know, like, from for newbies to, you know, maybe somebody’s been doing this for many years. Yeah. Good, good question. And, are you referring to, like, in the context of, like, actually, actually, like, implementing new software or just more generally speaking?

Yeah. Let’s start generally speaking. Right? So, like, general generally speaking, what are some of what are some of the big mistakes you’ve seen people make, in the beginning that kinda messed things up? Like, I know, like, when I started, I I guess my balance, what is it?

Your your balance sheet? My balance sheet was messed up. And because that starts from day zero, no matter what you do, it’s it never gets fixed in my opinion, in in my anyway, at Empire, anyway. So just tell me, like, okay. So, like, what are some of the most common mistakes that people make when they’re just starting out, like, in business, especially in a property management business?

Yeah. Great great question. So, I think that one of the interesting things is and I’ll and I’m I’m sure, Pete, you probably had a very similar kind of trajectory or kind of, series of events is that, you know, most folks usually don’t start off in property management, like starting a property management business. You know, most brokers initially start off doing sales and doing brokerage types of services, whether they’re representing the buyer side or the sell side. Right?

And then over time, maybe things slowed down or maybe they had clients that that loved working with them and and asked them if they would be open to, potentially managing their properties, more property management capacity. And that’s usually 98% of folks that start in property management. And so, in property management, you know, you as a broker, you know, you have your PMA agreement. So you do your broker’s license is kind of on the line for the service that you’re offering as a as a property manager. And so and it’s not as easy.

You kinda kinda just start up and running as it is in the brokerage side of the business because you’re you’re you’re doing more transactional, right, during just the sales cycles. And then once that work is done, it’s it’s complete, right, versus property management. There’s, you know, a department of real estate that has a bunch of different compliance rules, a bunch of different regular, things that need to be addressed and keeping, you know, your funds not mixed between your corporate and whatnot. And then then they need to get your software kind of established. And so a lot of times, most property managers when they first start off their property management business, accounting becomes kind of an afterthought.

It’s not something that is is is at the forefront, or something that’s even really, really, considered. And a lot of times, they may have a leasing agent that they will slowly push into kind of more of an accounting role, if you will, or like a regular bookkeeper that starts doing more and more accounting activity. And so I would say that, you know, starting off, like, your property manager business, like, having the right accounting system is very, very important. One that you can actually manage all your clients’ funds separately. And then even just getting it implemented correctly is also kind of a a challenge.

You know? Nobody got into real estate because they love accounting and compliance. Right? And so, you know, you focus on the things that that make that make you or enable you to make the most amount of impact to your business, which is working with your owners, growing the portfolio, working with your, tenants. And, you know, it’s most often a lot more cost effective and and and sometimes usually the opportunity cost of of doing that admin work kinda yourself is better utilized by working with a third party firm that kinda focuses on that.

And so, so I know that’s the biggest thing. Focuses on that. And so, so I know that’s one of the biggest things. I know today, you know, 2025, there’s a bunch of property management packages, which has accounting built in. Right.

But I still see sometimes people using, like, QuickBooks Right. And using QuickBooks for their property accounting, and they use the same QuickBooks for their, you know, for their company books. Yeah. And so Yeah. So that’s that’s a a I I had a a company of mine, a friend of mine was doing just that.

Even after he bought AppFolio, he was still running it through QuickBooks. So, you know, for you guys out there, you know, especially very very newbies, the the property management software actually is the accounting software. Is that correct, Moe? That is correct. There’s a lot of programs out there that do kind of both all in one.

Like, operationally, if you think about, like, leasing and managing work orders, inspections, move outs, and then also the accounting side, managing tenant payments, vendor payments, putting together financial reporting, bank reconciliations. Now, you know, I can go outside and throw a rock and probably hit somebody that knows how to use QuickBooks. Right? It’s a very generic, broad based, very widely used across small businesses. And, you know, they have tens of millions of customers that are using it.

Very easy to use. But because it’s very generic, it’s not purpose built for property management. And in property management, you have certain compliance requirements like separating out funds between your corporate entity or management company versus your your, the properties that you’re managing and even things like man you know, separating out the security deposits and things of that sort that are kinda required. And these property management accounting systems have that in mind and how they were built. And so QuickBooks is a very general accounting system.

It’s not there’s no notion of a tenant in QuickBooks. There’s no notion of a building or a rent roll or anything like that. And so the advantage and value of using a property based accounting system is that, you know, you move out a tenant, the rent roll updates and now shows vacant. Right? And then the accounting for that particular property is segmented and separated from the other properties that you’re managing.

In QuickBooks, to do that, you know, you can use classes and a bunch of different things within the program to kinda separate that out, but it makes but it’s very difficult, very easy to make a mistake. And I would say most importantly is that the bank reconciliation process is much more different. You know, in QuickBooks, it’s just looking at your banking activity, and it doesn’t know, hey, what property is what. But but a program like AppFolio, for example, when you’re doing a bank reconciliation, it actually it’s looking at the property cash balances to ensure that that can be reconciled to the bank account balance. What do you say to somebody that says, well, I have 40 different, owners.

So I’m gonna create 40 different bank accounts for each one of my owners because I’m worried about the, you know, I’m worried I’m worried about commingling, and, also, I’m worried to make I’m worried about, you know, FDIC, right, insurance. Right? Like, over $250,000 or whatever. Right? So what do you what do you say to for those two things?

Great. Great. Great question. Great question. So firstly, you can certainly do that.

Now the challenge with that is that now you have 40 different instances that you have to log in. 40 different reconciliations. Right? 40 different banking accounts. Yeah.

Exactly. 40 different reconciliations. So the department of real estate doesn’t really dictate how many bank accounts that you have. Like, what they’re more concerned about is, hey. Do you have a good process and a process in general to ensure that you’re not, you know, stealing from Bob to pay John, if you will?

Right? And so, you know, there’s always a trade off with, like, hey. Should I have a separate bank account for every single owner, or should I just have one bank account that all my owners share? Should I have a separate bank account for security deposits from operating, or should I have, you know, one for the entire portfolio? And the answer is, like, all those options are perfectly fine, and they’re perfectly compliant as long as you are keep mon you’re making sure that you’re monitoring the accounting and the balances on a per property basis correctly.

And that’s also the value with a property based accounting system versus something like QuickBooks because QuickBooks won’t prevent you from there’s no controls inherently in the software that prevent you from overdrafting on a particular property that’s sharing a bank account with another property that has an actual positive balance. And so, and this is probably what some of the, like, one of the most kind of more egregious kind of violations that the Department of Real Estate would look for is that, hey. Are you stealing funds from one owner to pay the bills for another owner because they’re sharing the same bank account? And so the second question that you had about the FDIC insurance, that’s a really good point. So, when you are establishing a bank account, there are certain banks that offer what are called trust accounts.

Okay? Those banks, a couple that we work with pretty close here, like Genesis Bank and Enterprise Bank. And, and those banks are specifically for for property and asset and fund management. And in those particular banking structures, you can have one bank account, and each owner that is associated with that bank account will actually have and be insured up to 250,000. And so, my answer to kind of that challenge of, like, hey.

You know, I wanna make sure that I’m properly insured by the FDIC is get with or work with the bank that actually has trust accounts, and they’ll ask you for the list of the owners that will be tied to that bank account, and you’ll be insured 200 up to 250,000 for every single owner. Yeah. I I think, you know, if you go to your your big Chase or Bank of America, things of that nature, they don’t know what a what a, Yeah. What that type of account is. So they just write trust on the account, but it’s not really a trust account.

So Not really a trust account. That’s correct. So the enterprise and Genesys are the are the ways to go there. I wanna touch base I wanna touch back on what you said earlier because, I think I got it right. So if I have one bank account and I have 40 owners, and one owner goes negative, and I pull from another owner just in that bank account to pay the maintenance, you know, the the maintenance request, maybe goes over the reserve, and it goes negative, and then the rent comes in, you know, two weeks later, is that something that an auditor would would hit me for if they see that happen multiple times?

Or, because that you know, of not allowing a a entity to go negative really affects the way you can run your business. That is very yeah. That’s a really good point. And that’s and that’s very true. So, the way that like, we’re humans, and people can make mistakes.

Okay? Auditors recognize that also. You know, what they’re looking for is negligence more than anything else and kind of persistent kind of violations, if you will. And so, you know, if you have the right software and the right controls in place, you know, you would not have paid that maintenance bill that would have pushed the property or that owner’s funds into the negative. You know?

Programs like, you know, Afolio, Yardi. These programs have actual ways when you’re doing a payment run. They don’t allow the they don’t allow the portfolio to go negative. Right? They won’t actually write the check.

Yeah. Say well, tell that to my vendor who I’ve used, and and now I’m not paying them. And then he doesn’t call and then he hasn’t returned my calls anymore. Right. No.

And and that’s the that’s the, that’s the interesting position that a lot of property managers are in. Right? You have relationships with your vendors. Your vendors don’t Vendor works for me, not for the property owner. Exactly.

They could care less about, you know, who’s paying them. They just wanna make sure that they get paid, and they could care less about your owner relationships. But it’s very important. You know, one thing that you mentioned is kind of the reserve. Right?

Like, hey. There needs to be a certain level of reserve on the property. And over time, you should get a better feel of what that reserve should kinda look like. And then the other thing is is, you know, a lot of, a lot of like, one one one way to work kind of around that that a lot of clients will, go about this is, you know, the property management company will front the funds. And, obviously, it’s a separate bank account.

They’ll front the funds, and then they’ll bill back the owner because they have transfer transfer to and from. Exactly. And they’ll put a markup on it because they had to cover it. That’s a I think that’s a very simple conversation to have with the owner. Great point you made, though.

They’d put a markup on it. Right? So whether it’s a percentage or it is an administration fee, something should go in there. I’ll I’m gonna I’m gonna tell you a story, and and don’t judge me. Okay?

But, I used to allow my portfolio to go negative all the time. Mhmm. And when I sold to, when I sold to Mind, I had to do a complete audit. And I found I had $37,000 owed to me in owner funds, and that that went negative. Like, I just it went negative.

We had because we had so many owners, we were able to go negative that much, but I had to write a check for the 37,000. So I ended up paying for it. So if you’re listening to this, for you know, if you do put that control in, that is going to make your life a little bit more difficult because you’re not gonna be able to pay certain people at certain times. You know, like, when a light bill comes in, you and the money is the money is not there, but it will prevent you from going really cash negative big time. Right?

So you can make because now you have to do something about it. Right? I either have to take that thing off the the blocker or I have to invest money, my own hard earned money and put it in at the time, which hurts at the time. So I do highly recommend that don’t do what I did learn from my mistake. And don’t allow portfolios to go negative and actually have a process in place.

For owner we we have a process for tenant, you know, for tenant collections, have a process in place for, for owner collections. Yeah. Yeah. So one thing I wanted to add on that also, Pete, is that, you know, you as a property manager have a pretty good understanding of when, like, you know, maybe large renovation bills or remodels or things that are happening on the owner’s property. Right?

And you probably have a good understanding of average cost for, like, unit turns and things like that. And those are usually kind of the big build, big ticket items. Right? And so anticipating when those are gonna happen and maybe one the month prior when you know there’s a big bill coming, you can have a conversation with the owner like, hey. We know there’s gonna be a big bill that’s coming because of whatever renovation that you’ve already approved.

We’re not gonna give you a distribution this month, to ensure that we can pay that bill. Secondarily, you know, as I told you, we have we have a lot of clients also that just they they handle actually all the expenses, and they just bill back and put a markup on everything. And this can actually be a substantial kind of revenue stream. Maybe they use the corporate credit card or whatever to pay it, but then they’ll put a markup somewhere to the tune of 15 to 25%. Yeah.

And that can be can be substantial. Right? And then the other the last thing that I wanted to comment on, Pete, is, the other thing that we see and the reason why you don’t wanna just because, hey. You’re expecting rent to come in the next month. I mean, anything can happen with the tenants or the cash flow on the property.

Right? You know, COVID hit. People stopped paying rent or something happened, you know, with the handful property’s continuing to be a negative balance. There could be an instance where, you know, there there’s a disagreement or scuffle between you and the owner, and you are no longer managing that property. I can’t tell you how many times we’re auditing a client’s books, and we find a 100 properties with negative balances tied to the trust account.

They’re like, oh, well, these are past properties. We don’t need to worry about them anymore. No. Those owners That’s what happened to me. No longer active.

They stole from somebody else that had funds in the bank account. And you have to make it you have to make it right. So they end up stealing they end up stole they stole from me in this in my case. Yeah. That’s right.

And you allowed that to happen. That’s why you’re the broker on record. Right? You allowed that to happen. You paid those bills in order for that for those assets to go negative.

I’ll tell you in my experience, Moe, I got, the Moe when I got when I got the most time I went negative was, mainly when there was an eviction, and, secondarily, when there was a property that, that came out that was in between a turn and didn’t rent for a long time. Those are the two big ones, because those electric bills will eat up that, you know, I’m down here in Houston, Texas, so those electric bills in July, August, September, they’ll they’ll eat up that reserve like nothing. Right? You have one electric bill, one landscaping bill, you’re gone. And then, the owner, you know, he lives in China or he lives in, you know Yeah.

Some other place, and he’s like, yeah. I’ll get you the money, and he never does. The electric yeah. Electric bills can kinda sneak up on you. Fortunately, there are solutions for that too.

There are companies like Livable and and service, stuff like that, that will actually handle all the utility billing, will pay the utility providers, and then they’ll actually even charge the tenant an admin fee. I I rent from a property, managed by a large large man, multifamily, management company, and they, and I I I see a charge of, like, $10 that shows up on my ledger each month. That’s just the admin fee for utilities. And I know on the back end, there is a rev share model that’s happening. So the property manager is getting, like, a dollar $2 each month.

Sure. And the whole goal for the most part is either being paid by the tenants, been being, you know, being allocated using ratio utility billing. And so that can actually be a significant substantial revenue stream as well. Yeah. For sure.

Alright. I’m gonna moving on here. Where do you come out on so, when I ran my business, I had a security deposit bank account, and then I had kind of an owner’s bank account. I know legally, the at in Texas, anyway, they can be they don’t have to be separate, but we decided to do that separately. Where do you come out on?

Should we have separate account for security for security deposits versus, versus, you know, just owner accounts or or merge them into one one account? Yeah. Great quick great question. So us as being, like, CPAs and accountants, like, you know, we have a knack, and we’re obsessive about numbers and balance books, hence the name balance asset solutions. But, the, you know, for like, there’s you know, you can have a separate bank account for security deposit.

You can have a separate bank account for operating funds. That just means you now have two accounts to reconcile. You can have a separate bank account for operating if it’s a bank account for security deposit for every single property or for every single owner. The net of it is is that all these options in the states like California, they’re it’s not really required for you to have separate accounts, but you need to have the right processes in place. And so for organizations where you feel like you don’t have the right, the the the right controls in place, the right software that have been configured correctly, and the right accounting leaders or the financial leaders internally that are overlooking the books to ensure that things will not go negative, it’s better to just have separate bank accounts.

Because then that way you can ensure that those things are are separated and and and and you don’t have to worry so much about ensuring that one property is not going negative and things of that sort because they’re commingling funds. However, if you do have the right staff, software is kind of in place, the controls, and you have process. You know? I would say there’s three things in every business. You know?

There’s people process product. Your product is a real estate. Your process is very important. It’s the process is what’s either gonna be either what’s gonna make or break you in a lot of times. And, you know, I’ll tell you a story.

You know, we had a we had a client that, you know, they only had a they only had two bank accounts, one for all their security deposits, and they had a pretty substantial portfolio somewhere between about 3,800 units. And they’re up in the Pacific Northwest, so these are units that are paying rent somewhere between 3 to $40.45 3,000 to $4,500 a month in rent, which average security deposit being somewhere to the tune of 4,000. So they have security deposit liabilities close to, you know, $6,700,000. They, their owner sorry. One of their their their CFO who had been with them for literally twenty years, you know, he had created a fake property in the system, in their accounting system, and tied it to the security deposit account that where all the tenant secured deposits are staying, and he wrote checks out to himself.

And then on the bank records, creating bank adjustments to plug those holes. Wow. And then, like, void the checks in the accounting system even though on the bank statement, they actually cleared. And because he created those adjustments, you know, the bank reconciliation was still, quote, unquote, showing as reconciled and balanced. And then Wow.

Then comes an auditor then comes an auditor. And, of course, you know, the CFO sees the writing on the wall, quits, skips town, and that is it. That’s the last time the head owner hears from them. The owner reaches out to us to do a friend, and we found that he had been investing close to about $1,200,000 over the past three or four years. And that’s and that’s the thing.

The unfortunate thing about this industry is that, you know, embezzlement is actually very rampant. And and the So let’s talk let’s talk about that. Go ahead. Finish your thought, and then I wanna find out how we prevent that. Yeah.

Yeah. That’s actually what yeah. Okay. So the root the root of that is really the lack of control and oversight. You know?

As an owner, most most owners of real estate companies, property management, and the like are not financial gurus or accountants. They’re, like, experts. Right? And so just because you’ve had somebody in your staff that’s been with you for eons long, doesn’t necessarily mean and, you know, you wanna you wanna trust but validate. Right?

And so you need to have some control in place, and it should be a third party. It should the person that’s reconciling your bank accounts should not be the same person that’s also cut be able to cut checks and things of that sort. You need to have certain controls where nobody in the honestly, nobody in the organization should have the ability to be able to create, like, a property record, for example, because you can do a lot of damage in linking it to trust accounts even though it’s not a real property. And and you as the broker on record are signing the PMA agreements, so you should have some control there to ensure that there isn’t fictitious properties being created that could potentially be stealing funds out of the trust account. And so, process, process, process.

You wanna have process. You wanna have some type of a regular audit or control. And, you know, Pete, that example that you gave is is is not is not new. We’ve heard we have a lot of clients that will reach out to us. Hey.

I wanna sell the business. Can you guys help with the forensic audit? We do a forensic audit. Hey. You owe the trust account, like, $48,000.

It’s like, oh, well, auto manage those properties anymore. It’s like, okay. Well, this is how the conversation is gonna go with the buyer. They’re gonna do their due diligence. They’re gonna look at exactly Yeah.

How your books look, and you I can guarantee you they’ll probably hire, you know, professional accountant, a CPA, like our firm or some other firm that’s gonna ensure that the financials and the amount of funds that are in the accounts are actually correct and that they are covered. And if they find a shortfall, they will most definitely use that to negotiate against the buying the price that they’re willing to pay for your your, your business. So So so some of our clients, you know, they wanna hire a remote team member to do the bookkeeping. And so they ask, how do we, you know, how do we protect from that? And so let’s let’s talk let’s dive a little bit more into what you’re going with.

Right? So so you don’t wanna have somebody who can create a property, so, that also will will be able to, you know, basically make make payments, something like that. That’s right. Is all that ability in the Appfolios and the Rentvines of the world? Can I set up certain permissions and certain things?

That’s right. Yeah. Yeah. That’s a so that’s a good question. So, understanding how, like, how to utilize staff.

And I know that, like, you know, the concept of using virtual assistants, especially since COVID, has been becoming more and more prominent, especially in this industry. And we commend it. It’s not necessarily a bad thing. Okay? However, you need to have the right controls kind of in place.

And so you can have somebody like like a VA that’s inputting the initial invoice data entry. Like, hey. Somebody needs to input the invoice number, which is on the invoice, the vendor name, the property, the due date. You know? However, products like AppFolio and RentBinder stuff have an approval workflow, and you should have that in place.

This ensures that they do you know, you have them do kind of the initial coding work, and you have somebody more senior that’s in the organization or using an using an accounting firm like ours to actually do that final validation before the payment goes out. At the end of the month, when the owner distributions are being calculated, when management fees are calculated, you wanna make sure that that there is control and oversight of that process so that you know? And, Pete, I’m sure you probably noticed this also when you were selling your business is that, you know, you got property managers are moving so fast that you’re working with so many different vendors, rent everything from renovations, new owners, investors, what have you, that it’s sometimes it’s very difficult for you to say with high level of confidence that I am getting and billing all my management fees. You’d be surprised how many folks, like, will over overlook that. And it’s like, hey.

You know, if you’re not if you’re not paying yourself, like, what do you you know, what is the service guy using? What is it? What are you doing this for? Yeah. Not altruistic.

Right? And and so, and so things that have to deal with reporting, financials, bank reconciliations, Those are things that you probably wanna use a more tenured and, like, an accounting staff or even at a minimum have, like, an auditor that on each on a monthly basis is overlooking that because it only takes one situation or one scenario where, you know, things go haywire that puts you in hot waters. Right? Yeah. It’s funny you say that because we used to run a report monthly to determine, did we did we charge all the management fees for the previous month?

And, I’m sure always find things. Yeah. Yeah. We we yeah. Or we we also look at, you know, did we did we charge all the leasing fees?

Did we charge all the lease renewal fees? We so we would run these, but it took me a while to get there, you know. And luckily, I had a pretty good accounting person that worked for me at at Empire. Actually, I had I had three accounting people. Two were remote team members, and one was was, local.

You know, and you if you had probably hired you if I probably you guys were around and I and hired you guys, I probably would’ve only needed one person, not through three so that you guys can is that something that you guys offer? Like, you gotta do, like, a monthly review and you guys will go in and say, hey. These are the reports that we need to create for you and look at for you to make sure that there’s no embezzlement, to make sure that we are charging the fees that we wanna that we’re supposed to be charging, all that good stuff. Yep. Yep.

Yep. Yep. Yeah. I know. And you look at the permissions as well to make sure, hey.

Right. Lucy Lucy can create vendors, and she’s also paying. Like, so she should not be able to create a vendor if she’s making the payables. She’s doing the payables. That’s right.

That’s right. Or they have the ability to create bank adjustments. It’s like, why why do they have the ability to make bank adjustments? Like, saying they can they can literally rig and manipulate your bank reconciliation. It’s not and I’m not trying to say that most people are malicious.

You know? I’m trying to give people the benefit of the doubt. But you hear too many stories. Like, you still need those controls kind of in place because it takes one bad scenario for things to kind of dovetail in in the wrong direction. And so one thing, you know, we have clients that we have a lot of clients that use VA system stuff, and they’ll use our team for kind of, like, ensuring financial compliance, oversight, and ensuring that, you know, one, like, they have the right permissions in place as well, and then they’re looking at certain like, the right reporting, and and we help ensure that they are calculating and getting all their management fees.

Yeah. And there’s work The prop property management is a it’s an accounting intensive, industry. It really is. Not just for our own books, but for also our our clients. Right?

I mean, you have all this property accounting. If you have, you know, a 100 properties, that’s that’s a 100 pieces of accounting plus all the fees that you’re supposed to put out there, plus there’s all these people touching the system. So, yeah. I mean, it would just make sense to have an expert to just be there every monthly just to kinda do a review to make sure that everything is is running, you know, on point. So I want let’s roll into what are some of the financial KPIs as an owner of a property management firm I should be looking at on a on a monthly basis?

Yeah. Good question. So I’m gonna separate that out into two buckets. One is the financial KPIs that are relevant to your owners that you’re managing for, and then secondarily, our financial KPIs for you as a business operating as well. So for the owner funds, that’s trust accounting.

Right? So the things you should be the reports and KPIs looking at is the trust account balances, which is the property balances ensuring they’re never negative, that your security deposits are reconciled, and that the liability associated with your security deposits matches with what you have on your rent rolls, that your bank reconciliations are being done on a monthly basis and that there’s no adjustments. You stay stay away from things like journal entries, because a lot of these systems have what’s called subledger systems. So, like, a tenant ledger rolls up into the property ledger. So if you’re dealing with used to have a they used to have a button that just said, you know, make make a make a transaction.

Just, like, click on it, and it just reconciles itself. Right? Right. Just create some kind of journal entry. It’s also it’s also dangerous because you can do one-sided transactions.

Like, hey. I just wanna do a debit, not a debit and a credit. That’s the other control that you have with these accounting systems. So, so, yeah, trust accounts, security deposits, bank reconciliations, ensuring that those are current, that there’s no adjustments. And I would say specifically on the bank, the bank reconciliations, you wanna look out for things like stale items, especially in the deposit section.

Okay? If you have a deposit that is outstanding, in other words, it hasn’t cleared the bank yet, and it’s $10,000 and it’s been months, where is that cash? Right? When you enter a tenant receipt or you enter a deposit on a on a on a property, it increases the property balance, let’s say in this example, by $10,000. It won’t clear the bank until you put that $10,000 into the bank account.

Okay? So if you have outstanding items, deposits, if you bring it to the bank, it takes maybe one, two days to clear. Okay? So one to two days, behind on the deposits being cleared is fine. But if you have a deposit on there that’s showing over thirty days old, that is a concern because you inflated your your owner’s property balances.

You calculated distributions based on that inflated balance, and you have the potential now of of of your checks bouncing when you’re doing distributions. We had a client that had over $400,000 in outstanding deposits that never cleared the bank. And, in one month, she doing her own distributions, and her owners were calling back saying, hey. My check balance. My check balance.

She’s like, oh, well, I look I’m looking at your property balance, and it’s and it’s it has the balance. But, you know, what happened is that, you know, that those funds were never put into the bank account, and that was actually a result of embezzlement for one of her staff members. Wow. And she did not know. And, yeah.

So, the other set of KPIs for you as a as a property management company. So, I mean, you wanna look at, you know, things like profitability, your revenue, so management fees, leasing fees, maintenance fees. You should be putting markups on maintenance. That’s something that is that is very normal in the industry. We see on average about 15 to 20% renovation is closer to 25%.

And then, and then also, like, the admin fees, like things like application fees, NSF fees, late fees, if you’re in insurance fees as well, and all the all these things are, important to you. And then and then I would say also is just the, the profitability. A lot of companies will, you know, have, like, a unit that they’re turning over, for example, and that you, as a management company, may be taking on some costs yourself. So what are those costs? Like, there can be soft costs like marketing related costs.

Like, okay. How, you know, how are you following those costs and ensuring that you guys are making a profit off of it? If you have a leasing fee, whatever that you expended in actual marketing fees, including the time that your staff is spending on turning that unit over or filling that unit should not be more than the actual leasing fee. If it is, then that’s that’s something that needs to be looked into. It should be a profit center.

Right? And so I think, I’m trying to remember the the the financial KPAs that we reviewed. I think one was, revenue per property and expense per property and profit per property. I think we looked at that on a monthly basis. A lot yeah.

And then, of course, we looked at where the where the revenue was coming from, in the reporting, but that wasn’t a KPI, but the rev per property and expense per property. Yeah. That’s that’s were you guys managing your own properties, or it was, properties for on behalf of owners? No. That was, that was third third party management.

Right? So Third party manager. Yeah. Yeah. Yeah.

I mean, that’s good. I mean, most companies, honestly, don’t usually look at the p and l’s, for their owners. It’s just like, hey. This is the rent that kinda came in. These are the expenses, my management fee, and that’s kinda it.

And here’s your report type of thing. But that’s good that you guys took a look at that because No. No. We looked at it for the management firm. Not for the For the management firm.

Yeah. For the management firm. Yeah. One other KPI that I was gonna mention that a lot of firms, like, overlook is lease expirations and lease or rent increases. You’re making a piece you’re making a percentage of of a commission on the rent income.

So if you miss doing a rent increase and we have clients that approach us like, oh, we’ve missed, you know, eight we have we’re doing a rent increase now. We missed it. You know, it’s been eight months. Some of these are have properties in big markets where, like, the increase is, like, maybe $200, $300. They’re charging a management fee of of, of almost 10%.

Or they or they have an owner client that says don’t increase my rent because he’s scared that somebody’s gonna move out. Right? So, the way we solve that is we built a, we saw what the market was over the last so many years. It was, between 23%. So we built a two and a half percent increase in all of our all of our leases.

Also, when you get busy, lease renewal is one of the first things that goes away because you’re working on maintenance and turns and marketing and all this other stuff. And so we that happened with us. We ended up hiring a virtual assistant that just did lease renewals, and we went from, like, 30% of of residents on lease to 96% of residents on lease. And you get paid for a lease renewal. We got paid on both sides.

We had the resident pay us, and we also had the owner pay us. And we also make more money because we were percentage based. So That’s right. That’s right. That’s right.

Alright. So, accrual versus cash. What should a property management, company be running? That is a good question. So it comes down to, it comes down to, it’s a it’s a taxes.

Right? So, yeah, I mean, so there’s two ways you can run a business. Your tax basis can be different than your property management business. Okay? From a property management perspective, it should be done on cash basis.

The reason you wanna do it on cash basis is because you want to have a very strict oversight on cash flow. Okay? When I say cash flow, you know, obviously, you you know, if you’re if you’re looking to get this much income that you’re billing for, but you haven’t received everything and you’re making decisions on expense management, you wanna make sure you’re looking at the actual cash amount. So run the business on cash. Tax basis accrual.

The benefit of accrual is that you have things like write offs, and you have different ways to be able to use things like depreciation and capitalization of expenses. So, you know, if there’s an owner that you’ve been billing, they haven’t paid you, on a tax basis, you can write that off as bad debt. Right? But on a cash basis, you wanna be able to write that off because it’s not cash that you receive. And same thing when it comes to capital So does that mean does that mean two does that mean multiple P and Ls that you guys are that you are recommending?

Multiple P and L. No. No. No. So, I mean, it’s there’s some systems some a lot of these kind of systems, they do both.

They do both. Like, I fully it does both, accrual and cash. But when you’re looking at your business from, like, an operational perspective in your in your books and understanding, like, how profitable or how your business is performing, look at it on a cash basis. When you’re preparing to do taxes and putting together and compiling your financials, look at it on an accrual basis. That’s another big benefit with these software companies these different software products is that they’ve had they do they do dual in tandem.

And so it’s just you can it’s just a filter that you just click on in order to be able to toggle back and forth. Are you familiar with, like, positive pay from the banks where, I think I am. I am. Can you talk a little bit about that and tell us what the positives and negatives of it are? Yeah.

Yeah. So, so the the whole notion of positive pay, basically, you know, each time you write checks and whatever, you send that report out to the bank to let them know, like, hey. I wrote check one, two, three for x dollar amount to this vendor, so don’t block it. Right? It’s a control mechanism.

It’s there to it’s there for treasury management, like, control and services to ensure that money is not leaving out the door that you’re not aware of and that, you know, potentially embezzlement or other things can be there. Now the challenge is is is that the control you can you can you can you can have the control much earlier than that. A lot of these software products, you can have an approval workflow for during the invoice processing even before a payment is made. Once and you can have only certain people that can approve a payment. And so the challenge that we’ve seen with positive pay and to be honest, we’ve come across scenarios where, you know, clients had issues with embezzlement and funds being stolen even with positive pay because the person that embezzled from them is the same person that is sending the positive pay report.

Oh, man. Okay. So well, that goes back to the, what we talked about earlier. Right? Making sure that Exactly.

Exactly. So k. My my, my challenge was that I never I never was able to I never implemented it because the look. It’s a risk reward thing. Right?

The more controls, the less risk, but you have to do a lot more work on the price of the that comes from there. Right. And if you don’t do it right, then all of a sudden a check, like, you know, let’s say you send somebody their security deposit back, and that check wasn’t a positive, you missed it. And you know how many phone you’re gonna get it, like, a thousand phone calls from one person. A balance.

Or it wasn’t Yeah. Or or I couldn’t, yeah, I couldn’t cash the check. Negative reviews, maybe even, like, you know Yeah. So Yeah. And even your vendors.

Right? Even your vendors. A vendor comes to your office and is like, hey. Can you just pay me right now? I was like, alright.

You you you give him a check, and it’s, oh, you get held up with some other things. You forget. He comes the next day, and he’s like, hey. The check did not work. It’s like, oh, crap.

I forgot to send the positive pay reports to the bank, and you went to the bank same day that I got you the check. For me, it created too much work on the front end. I’d rather just write a check every once in a while if we had to, if we if we made a mistake. So Right. Right.

Right. And have that control on the front end. Right? Like, make sure that you have actual Hawkeyes on the approval process for invoices even before they go out. Alright, Moe.

We’re up against it. I’m gonna take a quick commercial break, and then we’ll come well, we’ll come have you come back and do the, do the lightning round. We’ll be right back, everybody. Sounds good. Sounds good.

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Moe Hussain, CEO, Balanced Asset Solutions. We’re gonna put you on the lightning round. Are you ready? Let’s do it. Alright.

What is one piece of advice you’d give someone just starting out into property management business? Do not be afraid to seek help. You know, you’re not an expert, and and don’t don’t assume just because you’ve seen other people or have worked in offices where that activity was occurring that you know everything you need to do. See if you can help. I’m gonna add higher balance asset solutions from day one just to set up your accounting correctly because it really caused me a lot of of of of headache when I when I have my accounting all messed up.

Okay. That’s right. Does pineapple belong on pizza? Oh, man. I’m pretty passionate about this.

No. For me, I can’t do sweet on no. No. I can’t. I love pineapple.

Separately, I love pineapple juice, but not on pizza. I’m I’m very much more of a savory and, like, love my meat and cheese not meddling with fruits. You know what, man? We can go have pizza any day you want, brother. I’m with you on that.

I’m with you on that. What was your first job? Oh, man. You know, I immigrated here from Somalia about twenty three years ago as a political refugee. My first job was actually door to door selling Kirby vacuum cleaners.

You’re showing your age, man. Oh, man. That’s that that’s why you’re, so you’re you’re the, you’re the diamond in the rough where or jewel of the Nile, like, where you have you’re an accounting person, but you also have sales experience. Like, the usually, the accounting people don’t don’t like sales. Not a Right.

Not a big You’re the one accounting guy can get on the podcast. Communication. It’s communication. That’s where I come down. It’s communication.

Not a lot of people can communicate well. What is your ideal vacation? Not answering any phone calls, emails, or text messages. A staycation, just not answering anything. I mean, I can be anywhere.

Okay. That could be Alright. If you could have if you could have dinner with anyone alive, who would it be? Oh, anyone alive. Anyone alive.

Yeah. This always stops our breakers. So if I said anyone, everybody says, oh, Jesus. Right? Like, so I have to, like, make it a little difficult here.

Oh, god. No. I’m alive. Oh, everybody. We stumped Moe.

Alright. Yeah. I’ll let you come back to that. Let’s get you a real real difficult well, I’m gonna give you a real tough one now. Which Disney character do you most associate with?

And, yes, you can use Marvel if you like. Probably Roadrunner. Roadrunner. I think that’s a BB character. I don’t know if that’s Disney.

But It’s not, but I’ll go with it. It’s a character. I’m good with it. I’m always I’m always moving, moving, moving. Always running.

Yeah. Alright. What’s, what’s one challenge you’re currently facing in your business? One challenge? Capacity and scaling.

You know? It’s, one challenge that we don’t have is actually, actually, like, inbound business and, you know, the need for our services, but trying to scale profitably in in a manner. Because we’re we’re bootstrapped. We have no debt. We have no investors.

And so doing that in a services based business is very, very difficult, especially trying to scale. Alright. Somebody who’s listening to this podcast, they, they have a question that I did not get to ask you. What, how how would they how would they, reach out to you? How do they get in touch with, with you guys or with a balanced asset?

Yeah. Great question. So, you can reach you can reach me at w w our company at w w w dot balanced asset solutions dot com. You can also reach out to me directly if you’d like the email, Moe,mo,@balancedassetsolutions.com. Alright.

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Many of them have CPAs. They’re just not in The US. Moe, thanks so much for being here today. See you, everybody. Thank you so much, Pete.

This has been a NARPM production. The views and opinions expressed in this podcast are that of the host and not necessarily those of NARPM.