If you think COVID-19 had a negative impact on property managers, think again.
Statistics show that the global property management market skyrocketed 8.7% in 2020. Now, it’s worth over $15 billion. Interestingly, most of this market growth is due to higher demand for tools and software designed to help property managers.
What about your property management business? Are you still doing your bookkeeping and accounting the “old-fashioned” way? Are you struggling to keep up with client demands or wondering how to use software to better operate your business?
Property management bookkeeping and accounting are the core of any successful business. In this post, we’ll explain the importance of bookkeeping for property managers, along with our best bookkeeping tips. Keep reading to learn more!
Property Management Bookkeeping: Why Does It Matter?
For novice investors, property bookkeeping and accounting might seem easy. All you have to do is record rental payments and deduct maintenance costs — right?
Any seasoned investor will tell you that successful bookkeeping involves more than tracking dollars and cents. The truth is that there are many steps you need to take to get started in property management accounting.
For starters, you need to understand the different transaction types related to your rental properties. You need to understand all local laws that relate to maintaining your properties and paying taxes. You also need to create a consistent, easy-to-use system for recording every business transaction.
In other words, your bottom line is the bottom line. Of all the companies that go out of business, 82% do so because of cash flow problems. Property management accounting software exists not only to balance your books but also to show you how healthy (or unhealthy) your cash flow is.
With this information in front of you, you’re equipped to make better decisions about your business. For example, is it financially viable to remodel one of your properties (or buy a new one)? Do you need to set more money aside to prepare for unexpected expenses or tax increases?
Bookkeeping Tips for Property Managers
The importance of property management bookkeeping is clear. The question now is: What’s the best way to do it?
Here are our expert bookkeeping tips to set you up for success.
- Open Separate Accounts
If you manage a single property, you may be able to get away with a single business account. But as your portfolio grows, the number of accounts you hold should also grow.
For starters, you’ll likely need a separate account to hold your tenant’s security deposit. Some states require landlords and property managers to keep these funds in a dedicated escrow account. This ensures the funds are readily available when the tenant moves out.
It’s also helpful to open a separate business account for each property you manage. All income from that particular property goes into a dedicated account, and you’ll pay for all expenses related to that property from the same account. This makes your bookkeeping tasks easier as you can easily track your expenditures for each property.
If you need another reason to keep your personal and business funds separate, here’s one more. Comingling — or combining your client’s money with your own money — is illegal and can get you into serious trouble with the law. Don’t take that chance!
- Know Your Transaction Types
Yes, bookkeeping keeps track of your income and expenses. But this involves more than just basic addition and subtraction. You also have to track whether each payment or expense is tied to a specific tenant or property, or if it’s a general business expense.
Here’s a quick breakdown of the differences between these transactions.
Tenant income might include things like rent payments, security deposits, late fees, or parking fees. Tenant expenses are things that happen on the property (such as a broken window or clogged toilet) that the tenant should reimburse.
Property income is a broad category that includes application fees, a reserve fund, tenant rent, and other types of fees. Property expenses include utility payments, property management fees, and payments to vendors or maintenance workers.
Some things listed above, such as tenant rent or late fees, also cross over into “business” transactions. Other expenses, though, aren’t tied to one specific tenant or property. This might include your property management software subscriptions, advertising costs, office rental, and legal fees.
Many of these items can be classified in different columns and cross over onto multiple ledgers. For that reason, you’ll need professional bookkeeping and accounting software to track everything.
- Use Property Management Accounting Software
Since we’re on the topic, let’s discuss how the right software can transform the way you run your property management business.
Unlike a basic accounting tool like QuickBooks, property management software like Yardi and Appfolio are designed for investors, landlords, and managers. With just a few clicks, you can view and edit ledgers for every property, every tenant, and every bank account connected to your business.
Need to reconcile last month’s transactions with your bank accounts? Easy. Need to print off statements for your quarterly tax returns? Done. Today’s software makes the bookkeeping and accounting processes so simple, you’ll wonder how you ever managed without it.
Better yet, you’ll find an impressive range of features to help you manage and grow your business. For example, many types of software include an online rent portal, allowing your tenants to pay rent electronically. Others have tools to help advertise vacancies as soon as the property becomes available.
Even if you haven’t used property management accounting software before, it’s never too late to start. You can sign up for training to learn how to use these different tools effectively, as well as how to better manage your accounting in general.
- Single-Entry vs Double-Entry Bookkeeping
Whichever type of software you choose to use, you still have an important choice to make when it comes to recording data.
Single-entry bookkeeping, as the name suggests, involves entering every transaction (incoming and outgoing) only one time. Of course, you can record them in separate columns to make things easier, but each transaction only appears once.
Doube-entry bookkeeping records every transaction twice — one time as a debit and one time as a credit. Let’s say you pay your cleaning service bill for one of your properties. You’d record this as a debit from one account and as a credit (as in, less money you own the cleaning service) in another account.
Both methods can work, but bigger businesses typically opt for the double-entry method. The extra details make reconciliation easier, which we’ll discuss next.
- Practice Regular Reconciliation
No, we’re not talking about making amends with anyone who’s wronged you — although that’s not a bad idea, either. Reconciliation in bookkeeping and accounting terms is, simply put, making sure that everything “adds up.”
It doesn’t matter how careful and meticulous you are. Mistakes happen. A “1” gets entered as a “7” or you find a missing or duplicate item. You’d also be amazed by how often bank reconciliation errors occur.
It’s a time-consuming and tedious process, but it’s something you need to do at the end of each month. Line up your business ledgers beside your latest bank account statements. Do the numbers agree? Or is something missing or inaccurate?
Keep in mind that the property management software we talked about earlier usually includes automated tools to streamline reconciliation. Another option is to outsource your bookkeeping and accounting needs to a professional service.
- Consider Professional Bookkeeping Services
As a busy property manager, you have a million t’s to cross and i’s to dot. Real estate in itself is an incredibly complex world with a lot of room for human error.
For these reasons, many property managers choose to outsource their financial needs to a qualified CPA firm. Bookkeeping services like the ones Balance Asset Solutions offers can help with everything including:
⦁ Management reporting
⦁ Accounts payable
⦁ Accounts receivable
⦁ Bank reconciliations
⦁ Month-end & year-end projections
⦁ Payroll processing
⦁ Tax preparation
Think of how much time and energy you could save if you outsource these tasks to a professional. This solution frees your valuable time while increasing your cash flow and streamlining the way you run your business.
Bookkeeping for Property Managers 101: Class Dismissed
The more properties you manage, the more important it is to keep detailed bookkeeping and accounting records. Even if you only own a few properties, you can streamline your business with the latest property management accounting software.
If you’re feeling overwhelmed at the thought of tackling everything on your own, don’t worry — help is available. At Balance Asset Solutions, our goal is to empower property managers like you with the bookkeeping services and tools you need to succeed.
Do you need training in how to use software like Yardi or Appfolio? Or would you like to hand the reins to a professional and outsource your property management bookkeeping tasks?
Either way, we’re here to help. Give us a call at 619.415.6826 or use our online contact form to get in touch. We’re ready to provide solutions to all your business needs!