The Landlord’s Guide to Property Management Accounting

Property management accounting is the process of recording, classifying, summarizing, and reporting all financial transactions related to rental properties. Effective accounting practices are crucial for property managers, as they allow for better financial control, informed decision making, and proper reporting to ownership.

Accounting helps property managers maximize rental revenue, minimize expenses, and optimize cash flow. By tracking all money coming in and going out, managers can identify profitable properties vs. those losing money. Strong accounting also enables accurate reporting to ownership on financial performance and position. 

There are several key benefits for property managers who implement proper accounting processes:

- Increased rental income - By closely monitoring receivables, occupancy rates, and revenue growth, managers can find ways to maximize rental income. This may involve adjusting rent prices, reducing vacancies, or minimizing concessions.

- Lower operating expenses - Accounting provides visibility into expenses to identify areas of waste or overspending. Managers can use expense data to negotiate better rates with vendors.

- Improved cash flow - With detailed accounting records, managers can ensure sufficient cash is available for expenses, maintenance, payroll, and distributions to owners. Cash flow projections also facilitate better capital planning.

- Compliance with regulations - Accurate records and financial statements help property managers comply with accounting rules and tax regulations. This reduces audit risk and penalties.

- Enhanced reporting - Accounting generates standard and custom reports so property owners can regularly review financials. Key metrics can also be benchmarked against other properties.

- Informed business decisions - With meaningful financial insights, managers can make data-driven decisions on rent rates, capital improvements, property acquisitions or sales, financing, staffing, and more.

By embracing sound accounting practices, property managers can optimize financial performance, minimize risks, and operate their business more efficiently.

Key Accounting Principles for Property Managers

Understanding a few key accounting principles is essential for property managers to set up their books correctly and produce accurate financial statements. Here are some of the most important concepts:

Cash Basis vs. Accrual Basis 

There are two main methods of accounting - cash basis and accrual basis. 

With cash basis accounting, income and expenses are recorded when cash actually changes hands. This means rent revenue is recognized when the rent payment is received, and expenses are recorded when they are paid.

Accrual accounting recognizes revenue when it is earned and expenses when they are incurred. So rent revenue is recorded in the month it is due, regardless of when payment is received. Expenses are recorded when the liability is incurred, not necessarily when paid.

Accrual accounting gives a more accurate picture of financial performance over time. It is the required method under GAAP standards, so most property management companies use accrual accounting.

Generally Accepted Accounting Principles (GAAP)

GAAP refers to the official guidelines and standards for financial accounting. It lays out approved methods for measuring, recording, and reporting accounting data. 

Following GAAP standards is important for producing financial statements that are reliable, consistent, and comparable across different companies and industries.

Key GAAP principles for property managers include:

- Revenue recognition 

- Matching principle (match revenues and expenses)

- Consistent application of methods over time

- Disclosure of accounting policies

- Classifying assets and liabilities appropriately 

Adhering to GAAP lends credibility and ensures proper compliance.

Double Entry Bookkeeping 

This core concept requires that every financial transaction be recorded in at least two accounts. This creates a system of checks and balances to ensure the books are always in balance.

For example, when rent is paid - 

Debit Cash 

Credit Rental Income

The debit and credit offset each other to balance the books. This double entry method provides a clear audit trail and minimizes errors.

Using double entry bookkeeping is critical for accurate property management accounting. Understanding these key principles provides a foundation for proper setup of books and reporting.

Setting Up Your Accounting System

One of the most important steps in property management accounting is setting up your accounting system properly from the start. This includes choosing appropriate accounting software, establishing a clear chart of accounts, and implementing processes to track all income and expenses.

Choosing Accounting Software

There are many software options available for property management accounting. QuickBooks is one of the most popular choices as it provides robust accounting features while remaining user-friendly. Other options like AppFolio, Buildium, and RentManager are specifically designed for property managers. Consider how many properties and units you manage, your budget, and required features when selecting software. Cloud-based programs allow for easy access from multiple locations.

Setting Up Your Chart of Accounts 

Your chart of accounts is essentially a list of all the accounts you need to track for your property management business. Start by setting up categories for assets (e.g. cash, accounts receivable, security deposits), liabilities (e.g. accounts payable, mortgages, loans), equity, income (e.g. rent, application fees, laundry revenue) and expenses (e.g. advertising, repairs, management fees). You can add individual accounts within each category. Follow best practices for your chart of accounts setup.

Tracking Income and Expenses

Accurately tracking all income and expenses on an ongoing basis is crucial. Record income when it is earned, such as when rent is due. Track expenses when they occur by unit and property. Implement processes and approval workflows to ensure all transactions are properly recorded in your accounting system. Regularly enter transactions and reconcile accounts.

Managing Assets and Liabilities

A property manager must carefully track all assets and liabilities associated with the properties they oversee. This includes properly accounting for security deposits, accounts receivable/payable, reserves, and more.

Security Deposits

Security deposits represent a liability for the property management company, as this money is owed back to tenants if certain conditions are met. It's crucial to have procedures in place to handle security deposits:

- Collect deposit at lease signing and provide receipt to tenant

- Maintain detailed ledger with unit number, tenant name, deposit amount 

- Keep deposits in separate bank account 

- Track interest earned on deposits in states that require it

- Inspect unit at move out and make deductions if needed

- Return deposit to tenant within time frame specified by state law

- Provide itemized list of any deductions from deposit

Accounts Receivable and Payable 

Tracking accounts receivable (money owed to the property) and accounts payable (money owed by the property) is vital for cash flow management. 

For AR, property managers should:

- Send invoices and track due dates for any money owed  

- Follow up on past due accounts with calls, emails, letters

- Assess late fees per lease terms

- Provide monthly AR aging report 

For AP:

- Pay vendor invoices by due date to avoid late fees

- Take advantage of discounts for early payment

- Review AP aging report to avoid unpaid bills  

Managing Reserves

Reserves help pay for predictable and recurring capital expenses like roof replacements or painting. Property managers should:

- Calculate appropriate reserve amounts during budgeting 

- Set up dedicated reserve bank accounts

- Collect reserve fees monthly along with rent

- Limit withdrawals to approved capital projects

- Track reserves by property and update balances monthly

- Top up reserves if they fall below target funding  

Properly managing assets and liabilities will keep the properties financially healthy over the long-term.

Financial Reporting Best Practices

Financial reporting is a critical aspect of property management accounting. By regularly producing detailed financial statements and reports, property managers can closely monitor the performance of their portfolio, communicate with stakeholders, and make data-driven decisions. Here are some best practices for financial reporting in property management:

Generate Monthly and Quarterly Reports

Property managers should produce comprehensive financial reports on a monthly and quarterly basis. These reports provide an overview of income, expenses, cash flow, accounts receivable/payable, and other key metrics for each property and the overall portfolio. Monthly reports help identify issues early, while quarterly reports spot longer-term trends.

Create Budgets and Cash Flow Forecasts

Budgeting and forecasting are essential for property managers. Annual property budgets estimate income and expenses to determine profitability. Cash flow forecasts project income and expenses month-by-month to anticipate cash needs. By comparing actuals to budgets and forecasts, property managers can quickly see financial performance deviations and make adjustments.

Benchmark Against Other Properties 

Benchmarking involves comparing the financial metrics of your properties to industry standards and other similar properties. Property managers can access benchmarking data through industry associations and market reports. Comparing metrics like operating expenses per square foot, gross rent multiplier, cap rate, vacancy rate, and more can indicate where your properties excel or fall behind.

Present Reports in Clear, Actionable Formats

Financial reports should present data in easy-to-understand formats like charts, graphs, tables, and key takeaways. Avoid overly complex reports. Make sure reports are customized for different audiences like owners, investors, and internal team members. Well-formatted reports allow stakeholders to grasp performance and make informed decisions.

Notes on Sources and Variances 

Include footnotes on reports that explain the source of all data and any abnormalities or variances. This provides context and transparency. For example, note one-time expenses, lost income from vacancies, or the exclusion of certain properties. 

By following financial reporting best practices, property managers can deeply understand property performance, communicate clearly with stakeholders, and optimize their portfolio's financial results.

Maximizing Profits

As a property manager, your goal is to maximize net operating income (NOI) for the properties you oversee. This ensures the highest possible returns for owners and investors. There are three key ways property managers can increase NOI:

Setting Optimal Rental Rates 

One of the most important drivers of NOI is setting rental rates at the right level. You want to charge enough rent to generate strong cash flow, but not so much that units sit vacant. Analyzing comparable properties in your market is crucial - this allows you to price units competitively. You can also use yield management techniques, increasing or decreasing rent based on demand. Properties in high-demand areas or during peak seasons can command higher rents. Just be sure to leave some wiggle room for concessions if needed.

Minimizing Vacancies

Vacant units are one of the biggest drains on NOI. Not only are you missing out on rent, but you still have to pay expenses like insurance and maintenance. Limiting vacancies requires attracting and retaining good tenants. Marketing available units through online listings and signage is key. Offering concessions like a free month’s rent can also entice prospective renters. Once you have good tenants, take care of them with prompt maintenance and excellent service to discourage turnover.

Controlling Operating Expenses  

Careful management of operating expenses can have a big impact on NOI. Shop around with vendors to get the best rates on maintenance, utilities, landscaping, and other services. Perform preventative maintenance to avoid major repairs down the road. Evaluate staffing to ensure optimal coverage without overspending on payroll. Leverage technology like smart thermostats to reduce energy costs. Every dollar saved on operating expenses goes straight to your bottom line.

By optimizing rental income and minimizing expenses, property managers can maximize NOI and returns for their clients. This takes diligent financial analysis, decisive action, and constant monitoring of market conditions and property performance.

Handling Rent Collection

The rent collection process is a critical aspect of property management accounting and operations. Having clear policies and procedures can help maximize on-time rent payment while remaining compliant with regulations. Here are some best practices for handling rent collection:

Set Clear Payment Policies

- Communicate all payment terms, due dates, and late fees in the lease agreement. Require tenants to sign.

- State the acceptable forms of payment - checks, money orders, online payments, etc.

- Explain any grace periods or late fee amounts and timelines in the lease. Typically late fees are charged after 5-10 days past due.

- Outline consequences for non-payment, such as eviction proceedings after 30 days delinquent.

Send Timely Rent Payment Reminders 

- Send a rent reminder 5-7 days before the due date via email, text, and mail. 

- Send a friendly but firm late notice if rent is not received by the due date.

- Follow up at regular intervals such as every 5 days until rent is paid.

Offer Convenient Payment Options

- Provide easy online/app payments through a processor like Cozy or Avail. 

- Allow pay-by-phone options.

- Accept multiple payment types - checks, credit cards, ACH, etc.

Follow Late Payment Procedures

- Enforce late fees per the lease terms - typically 5% of rent.

- Send registered letters as an official notice of non-payment.

- Proceed with legal eviction after 30 days if no rent payment is received.

Maintain Detailed Records 

- Log all rent payments with date, amount, type.

- Track late payments and fees. 

- Document all notices, letters, calls regarding non-payment.

Comply with State and Local Laws

- Adhere to state laws regarding late fees, notices, and evictions. 

- Avoid discriminating against tenants when enforcing policies.

- Work with legal counsel before proceeding with any evictions.

Paying Vendors and Expenses

As a property manager, you'll need to pay for various services, repairs, maintenance, utilities, and other expenses related to running your properties. Having clear procedures and policies for making payments to vendors is essential for maintaining good financial control. Here are some best practices to follow:

Set Up Approved Vendor List

Maintain a list of approved vendors that your property management company uses frequently. Get their W-9 tax forms on file so you can issue 1099s at year-end for any vendor paid over $600. Require proof of insurance from vendors before adding them.

Establish Invoice Approval Process 

Set up a system where invoices are reviewed and approved by the appropriate person before payment is made. Property managers should approve any invoices relating to their properties. Have a threshold where invoices over a certain amount require a second approval.

Manage Accounts Payable

Use your accounting system to track all unpaid vendor invoices in accounts payable. Enter bills as soon as you receive them to keep AP up to date. Review AP aging reports regularly to ensure invoices are paid on time. Prioritize paying older invoices first.

Pay by Check

Pay vendors by check to maintain a clear paper trail. Avoid paying in cash, which can increase fraud risk. Require dual signatures on checks above a specified dollar amount. Use online bill pay only for established vendors.

Pay Contractors Properly

For independent contractors who provide services like landscaping, cleaning, maintenance, etc., follow IRS rules. Have them complete a W-9 and 1099 them at year-end for amounts over $600. Don't treat contractors like employees.

Take Discounts 

Take advantage of any discounts vendors offer for early payment or paying within a certain number of days. This improves your profit margins. Calculate the true effective annual interest rate to determine if a discount is worth taking.

Review Statements 

Reconcile vendor statements to your AP records monthly. Look for any discrepancies, double payments, or fraudulent charges. Investigate any statement gaps to ensure no unpaid or lost invoices.

Following structured accounts payable procedures will help you gain control over expenses, improve cash flow management, and prevent costly errors.

Understanding Property Taxes

As a property manager, you will need to have a solid understanding of the tax obligations and implications of owning and managing rental properties. This includes being aware of how depreciation works for rental properties, properly filing 1099s for contractors, and having the right documentation and processes in place for tax season.

Tax Obligations Overview

When you operate rental properties as a business, you are subject to some unique tax rules and regulations. In most cases, rental income is considered passive income by the IRS. This means it is taxed at the ordinary income tax rate, rather than a lower capital gains rate. 

As a property management company, you are required to report all income received from renting properties during the tax year. This rental income should be reported on Schedule E of your Form 1040. You can deduct reasonable and customary expenses associated with operating the rental properties, such as property taxes, insurance, maintenance, utilities, and depreciation.

Property managers who hire independent contractors to perform repairs, maintenance, landscaping, or other services are required to issue a 1099-MISC form to those contractors if annual payments exceed $600. These 1099 forms must be provided to contractors by January 31 and filed with the IRS by February 28.

Depreciation of Rental Properties

One of the biggest tax benefits of owning rental properties is the ability to claim depreciation as a deductible expense. Depreciation allows you to deduct a portion of the purchase price or cost of improvements on rental properties each year. 

For residential rental property, the depreciation deduction is calculated over 27.5 years. You can use the straight-line depreciation method, claiming an equal deduction each year. Alternatively, an accelerated depreciation method allows larger deductions in the early years and smaller amounts later.

Tracking depreciation for each rental property is key. You will need to know the property's basis, or its original purchase price, as well as document any capital improvements made over the years. Your CPA can help calculate the annual depreciation you can claim.

Filing 1099s for Contractors

Part of your responsibility as a property manager is to track payments made to independent contractors and service providers and issue them an IRS Form 1099-MISC by the end of January. 

This includes any individual or unincorporated entity you paid more than $600 for services related to your rental properties, such as a plumber, painter, landscaper, etc. Failure to file 1099s can lead to penalties from the IRS.

Be sure to collect W-9 forms from all contractors and vendors you plan to pay more than $600 and keep detailed records of payments made. Talk to your accountant to ensure you are properly tracking and reporting contractor payments each year.

Proper 1099 filing and documentation provides a paper trail for the IRS and can help avoid issues if your tax returns are ever audited. By staying organized and being diligent about tax reporting, property managers can ensure they remain in compliance.

Payroll for Property Management 

Managing payroll is a critical part of property management accounting. As an employer, property management companies have important responsibilities when it comes to paying employees and complying with payroll regulations. Here's what property managers need to know:

Payroll Setup

To start processing payroll, property management companies need to establish some key elements:

- Obtain an EIN: An Employer Identification Number (EIN) is required to report payroll taxes to the IRS. This number identifies the business as an employer.

- Choose a payroll provider: Most property managers outsource payroll to a provider like ADP, Gusto or Paychex. These companies handle tax filings and payments.

- Set up payroll schedules: Decide how often employees will be paid - weekly, biweekly or semi-monthly. Schedule pay dates in advance.

- Gather employee paperwork: Have new hires complete W-4 forms for federal tax withholding and applicable state forms. Keep these on file.

- Classify employees: Correctly classify employees as exempt vs non-exempt for overtime under the Fair Labor Standards Act (FLSA).

Calculating Wages

On each payday, property managers need to calculate gross wages for each employee based on:

- Hourly rate - For non-exempt employees paid hourly. Track hours worked.

- Salary - For exempt salaried employees. Pay a set weekly, biweekly or monthly amount.

- Overtime - Any hours over 40 in a week are paid at 1.5 times the hourly rate.

- Bonuses or commissions - Any additional incentive pay earned.

- Reimbursements - Mileage, travel expenses, etc. 

Review timekeeping records or timesheets to determine hours worked and gross pay.

Paying Taxes

Both employers and employees pay taxes on wages:

- Income taxes - Withhold federal and state income taxes per employee W-4s. 

- FICA - Withhold 6.2% for Social Security and 1.45% for Medicare. Match this as the employer.

- SUTA - Pay state unemployment taxes. Rates vary by state.

Remit all payroll taxes to the relevant federal, state and local agencies by their due dates to avoid penalties. Issue W-2s to employees by January 31 reporting annual wages and withholdings.

Conclusion

In wrapping up this comprehensive guide on property management accounting, it's evident that implementing robust accounting practices is crucial for maximizing rental revenue, reducing expenses, and optimizing overall financial performance. The intricacies of property management accounting require a tool that is not only powerful but also specifically tailored to the unique needs of property managers.

This is where Hemlane steps in. Hemlane's sophisticated accounting features are designed to ease the complex tasks of property management. From facilitating seamless tracking of income and expenses to offering detailed financial reporting and compliance with accounting standards, Hemlane provides a comprehensive solution that enhances efficiency and accuracy. Whether you are handling security deposits, managing payables, or ensuring compliance with tax obligations, Hemlane's software streamlines every aspect of property management accounting.

For property managers looking to elevate their accounting practices, explore more about how Hemlane can transform your business operations here. With Hemlane, you're not just managing properties; you're maximizing potential and achieving greater financial success.