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Accounting Best Practices for Property Management Companies

November 20, 2018

If you are managing your own properties, becoming familiar with financial regulations and accounting best practices is critical. Although regulations vary by state and jurisdiction, there are several key guidelines that can help you structure the financial operations of your company in a way that ensures your compliance.

1. Establish Trust Accounts

Establishing proper trust fund accounts for your property management business helps ensure that funds are used for their intended purpose. According to Propertymanager.com, misuse of trust accounts is the leading reason property management companies are audited.

Experts often recommend setting up two separate trust accounts for each client: one for security deposits and one for rent collection and bill payment. This may be more than your state requires. But it helps you maintain clear, separate records of individual owner funds, tenant security deposits, and company operating capital. And, this setup will protect you in case of an audit.

2. Maintain Reliable and Timely Financial Records

When you actively maintain meticulous records of all financial transactions related to your business, it allows you to closely monitor individual properties’ income and expenses.

Careful record keeping makes it easier to spot trends and find answers to common, critical property investment questions. It allows you to troubleshoot potential problems and respond quickly respond to owner inquiries:

  • What is the property’s market performance?
  • How competitive is it with regard to its size and amenities, relative to the local market?
  • How often do maintenance issues occur on the property?
  • What is the nature of the maintenance issues?

You should also save paper copies of documents and transaction records, even if you also have electronic copies of your state’s regulations that require you to provide comprehensive documentation.

3. Avoid Impropriety

You should always keep company and personal funds separate from trust account funds. Money in these funds belongs to clients or, in the case of security deposits, to tenants. Commingling funds is illegal. Many states have laws that dictate more specifically how funds should be handled, so be sure to check your laws.

  • Avoid depositing the company’s operating funds into trust accounts that handle property owner funds or tenant security deposits.
  • Many jurisdictions also regulate how long an agent, broker, or property manager has to withdraw commissions or fees from a property trust account. You’ll need to have a system in place to ensure you can withdraw your commission or fees in a timely manner and don’t leave them in the account for longer than permitted.

Following these principles will help your business stay in compliance with the applicable financial regulations and will assist your company’s record-keeping practices. For more information about accounting guidelines for your property management operations, you can consult an attorney or research other resources such as Probability.com’s Property Management Risks and Best Practices report.

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