Tag: accounting for real estate investors

Property Management Record Keeping: The Basics

As you undertake the endeavor of managing your property, you’ll quickly realize that it’s not just the property itself and the accounting that you need to keep in order.

What is Document Retention?

You will need to “bring the receipts” to any situation that may arise as a result of discrepancies or legal issues between you and your tenant, vendors, or anyone else you conduct business with.

Property management is rife with paperwork! Document retention guidelines will help you know what paperwork to keep, and for how long. Planning ahead and determining up front how you will organize and file your documents will save you a lot of time and trouble down the line. Rather than reorganizing and filing years of paperwork, have a plan for document retention going in.

Establish a Document Retention Policy

If you are managing your own property, then you are your own document retention officer. Your first step to success will be to institute a document retention policy. This will be your personal guide to how you will organize your files, whether they are physical or digital, and for how long you will keep them on record. Your DRP needs to reflect both federal and state requirements, most specifically the statute of limitations for breach of contract – you are, after all, preserving these documents in case there is a legal dispute. Legal disputes have periods of time after which they cannot be brought forward – you want to make sure you have all documents from within that time frame. While there are general guidelines to follow, your local regulations may have a longer or shorter statute of limitations.

Texas, for example, has a four-year statute of limitations while federally, you’re generally protected from lawsuits after seven years.

If you’re already up to your elbows in paperwork, teaming up with a Property Management Company like Frontline Property can take that out of your hands (and off your desk)! Your applications, contracts, leases, and vendor receipts are stored digitally for convenience and accessibility, and you can rest in the knowledge that if necessary, we can and will bring the receipts to resolve any dispute!

Let us protect your frontline so that you can focus on your bottom line!

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Property Management Accounting: (More About) Security Deposits

In our last post, we discussed how to properly account for security deposits in your financial holdings. Which bank account to deposit the security deposit into, and how and when to tax it as income is important, but is just the tip of the iceberg. Issues arise with the heft of details that lay beneath the surface.

Security Deposit Laws Vary by State!

There is no guarantee that the property you own is in the same state as you. Don’t assume that the security deposit laws are the same! You don’t want to be caught withholding funds due to overlooking a state law! Know the state (and city!) laws and ordinances that cover your property.

What is the Maximum Amount That Can Be Charged?

This amount can vary from one state to another, and there may be considerations for people over a certain age, tenants who have pets, and how long of a lease is being signed. Deposits normally range between one and two month’s worth of rent as a base.

In many states (such as Texas) there is no legal limit to what can be charged for a security deposit. However, the standard is one month’s rent plus any pet deposits that are due. Keep in mind that city ordinances may also set local limits on security deposits.

How Much of the Security Deposit Can I Keep?

Property managers everywhere have, at some point, struggled with a tenant over charges upon move-out. It’s important to know that normal wear and tear on a property cannot be considered damage that is deductible from the security deposit. If a carpet is worn from years of tenants living in a property, that is to be expected. However, if a pet damages or stains the carpet, that is abnormal wear and tear and can be deducted.

All reasonable charges for abnormal damages must be itemized and documented in a letter, for both your records and for the tenant. Under Texas law, if there are any deductions from the security deposit, this accounting letter must be sent to the tenant’s forwarding address with the remainder of the security deposit (if any) – or the bill if charges were in excess of the security deposit.

The goal is not to keep as much of the security deposit as you can – the security deposit is entrusted to you in good faith that it will be used to cover damages to the property upon move-out. This is why the security deposit is not considered income until after the damages have been assessed and the remainder returned to the tenant. It should be equal to, not more, than the cost of repairs needed.

When Do I Return the Security Deposit?

In Texas, the security deposit must be sent to the tenant within 30 Days of receiving the tenant’s forwarding address. This is to allow time for a final walk-through and assessment of the property. An exception to this is if the tenant vacated the property while owing rent, you do not have to send an itemized list of deductions.

There are penalties for landlords who do not return the security deposit promptly when due – if a tenant becomes litigious, they can rightfully be awarded $100, three times the security deposit, court costs and attorney’s fees. A big price for what could be a simple mistake!

Can a Tenant Use their Security Deposit as Last Month’s Rent?

The short answer is no.

While it is legal in some states, it is inadvisable to your business as a landlord. Security deposits may not cover one month’s rent if rent increased over the tenancy. You would be cutting yourself short in that regard. Furthermore, if there are damages beyond normal wear and tear, then the tenant will still be responsible for those charges but you will not have easy access to funds and may be stuck out in the cold, or have to take your tenant to small claims court.

In Texas, it is outright illegal for a tenant to withhold payment on the presumption that their security deposit can cover last month’s rent. The penalty to the tenant for this is three times the monthly rent, and whatever court costs and attorney fees were incurred by the landlord’s suit to recover the rent.

Landlords will be faced with these questions lease after lease. It’s in your best interest to stay informed, maintain orderly accounts, clearly state your expectations in your lease, and to abide by the laws that govern your property!

If that’s a bit daunting, team up with Frontline Property Management! We have an on-point accounting department and a full staff of professionals and Property Managers who stay up-to-date on the latest regulations and will handle all of the details so that you don’t have to!

Property Management Accounting: Security Deposits

Handling security deposits can become unexpectedly contentious upon move-out or the sale of a property that currently houses renters. This is because although you, as the landlord, hold the funds, the money belongs to the tenant until such a time as the property is surrendered back to the owner. How you account for the security deposit matters well before move-out!

Keep It Separated

The easiest way to manage the security deposit is to keep it separate from other funds. This means setting up an account specifically for the security deposit. If you manage multiple properties, then the security deposits could all go into the same account. Separating the security deposits ensures that these funds are not comingled with your personal funds (remember, the money belongs to the tenant!), prevents accidental spending for other properties, and makes it easier to track and get back to the tenant once damages have been assessed.

Interest or Non-Interest Bearing Account?

In separating security deposits, you may have a choice of whether the funds earn interest. This is legislated on both the state and local levels. Some states require that security deposits are moved to an interest-bearing account and that the interest as well as the security deposit are returned to the tenant upon move-out. In Texas, no such law exists. In the Lone Star state, you may deposit the security deposit into an interest-bearing account without the obligation to return any interest generated from the funds to the tenants.

Tax it Correctly

One of the best reasons to keep on top of your accounting – besides being able to accurately predict future business directions – is that the IRS requires accurate income reporting. Although security deposits are funds that you receive from your tenants, again, this is not your money. Therefore, you would not count this as income upon receipt the same way you would account for rent. Security deposits do not become taxable as income until you have no legal obligation to return the amount to the tenant – and then, it would only be the portion of the deposit that was used and accounted as an expense to repair the property. You wouldn’t claim any funds that go back to the tenant as income.

Improper handling of security deposits can (and will) come back to bite you! A situation can get very litigious very quickly if a detail is overlooked or misunderstood. You need a property management company that understands the ins and outs of property law and state regulations. Frontline Property Management has a team of Accountants, Tenant Coordinators and Property Managers ready to take care of the details for you!

Find out how letting us manage your property will help you avoid costly mistakes!

Let us know if you need help with your rental!

Property Management Accounting Basics: Reconciliation and Redundancy

Humans are hard-wired to seek maximum reward with minimal effort. We are driven to find ways to get things better and faster while doing less work. We are also sometimes simply forgetful of details when we are focused on completing tasks.

Reconciliation

In accounting, however, you cannot spare any details. Reconciliation is the process of making sure your bank account statements match the ledger for your business, dollar for dollar, penny for penny. If it’s off, then you’ve gone wrong somewhere.

First, you want to create the habit of reconciling weekly if not daily, and at the very least monthly (depending on the size of your business). It’s a lot easier to track down a discrepancy, transposed number in a transfer or a missing deposit someone forgot to enter – among a litany of other things that can go wrong – if it happened within the last thirty days and not sometime in the last half a year.

To combat the inherent nature of people to play fast and loose with the details, it’s also important to incorporate redundancy in your accounting. In the creation of your Chart of Accounts, you’ll need to properly set up accounts and sub-accounts that best reflect the nature of these transactions. You will also need to create Journal entries for any transfers made between accounts. Think of your Journal as a “dear diary: I moved this money from bank Account A to bank Account B because of reason X”. You can cross-reference the Journal entry as a memo line when you make the “real” transfer in your bank account.

Multiple layers of reporting will make your life easier and your accounts simpler to manage. Depending on your state, your property management business may also be subject to audit. While audits aren’t fun, they’re even less fun if your reports aren’t in order. The Trust reconciliation report is a collection of reports that are commonly required to pass audits conducted by state property management licensing boards.

The report combines Bank Reconciliation and Bank Account Balance Breakdown. Reconciling on a regular basis makes this monthly reporting a breeze! In property management, there are plenty of factors that are out of your control, but proper accounting isn’t one of them. Be diligent, detailed, and redundant, and you will be able to make the best financial decisions to further your business.

Are you too busy to reconcile appropriately?

Of course, if this is overwhelming (and it very well may be) – don’t worry! If you’re too busy making deals to handle details, let a property management company like Frontline Property Management handle them for you! Our accounting department is focused on keeping your reporting pristine and your monthly reports rolling!

Let us know if you need help with your rental!

Property Management Accounting: Creating Your Chart of Accounts

Once you have decided which method of accounting you’re going to use,your next step is to set up your Chart of Accounts. At its simplest, your Chart of Accounts is a list (chart) of the different financial categories (accounts) you use for your property. This can take the form of anything from a written document or an excel spreadsheet to property management accounting software – which we highly recommend!

Your Chart of Accounts is a way to keep track of where your money is going and why. It is the foundation of your financial record keeping and lists every account that your transactions can be sorted into and whether that account is an expense (money going out) or an income (money coming in). The more accounts you have, the more complex your Chart of Accounts will be, but the more insight you will have into your cash flow.

For example, in a simple Chart of Accounts you can have an account that is “Utilities” that is labeled an “expense”. You could also then break down Utilities into sub-accounts: Water, Electricity, Trash, et al. Therefore, you can see every expense for exactly what it is when it leaves your bank account. Every account has a ledger, or a record of the transactions. The General Ledger maintains the balances of an account (such as “Utilities” from the previous example) and sub-account Ledgers, should you choose to use them, are line-item transactions within that account (specific Utility bills invoiced and paid). Your Chart of Accounts is the organizational tool for your ledger, and is not the ledger itself.

A more detailed Chart of Accounts also manages assets, equity, and liabilities and employs block numbering to do so. Block numbering allows you to organize your accounts by type with the sub-accounts that allows for line-item accounting. Block numbering also makes room to easily add in accounts as you grow your portfolio. This way, you can see how your properties are doing individually and how your business is doing on the whole.

Think of your Chart of Accounts as the easiest way to communicate your business with your accountant or banker, and the best guide to making financial decisions for your future! This is an example of how a detailed Chart of Accounts logs its financial transactions.

Are you too busy to manage a complex Chart of Accounts?

Let Frontline Property Management, Inc handle it for you! We give you the detailed reporting you need to stay on top of your passive income by crunching all of the numbers ourselves. Consider us your property management accounting team!

Find out more about how we can help you manage and grow your property portfolio!

Property Management Accounting: Accrual Vs Cash-Basis Method

Being a landlord is a business, and whether you’re managing one property or several, you need a method of keeping track of your transactions. It’s not just about collecting rent (if only it were that easy!) but you also need to decide how to track charges for repairs and services. All of this needs to be reported at the end of the year, not to mention it’s always good to know what your profit margin is!

There are two methods for accounting for your transactions: Accrual and Cash-Basis.

Accrual VS Cash Basis

The Accrual Basis

Using the Accrual Method, you would create transactions when money is earned or owed, not when the money is actually exchanged. An invoice, for example, is a notice of money due. You would note the invoice in your books then, and not when you’ve actually paid the invoice later.

The Cash Basis

When using the Cash-Basis Method, your books would reflect the exchanging of funds from your accounts exactly when it occurs, eg, you would note the invoice when it was paid, not when it was received.

Smaller businesses typically use the Cash-Basis Method, as it is simpler and reflects a more immediate status of where your cash flow is at the moment. The Accrual Method, however, can give insight into the long-term health of your business as it takes into account future income such as rent, and expenses and invoices that are due but have not yet been paid out.

Whichever method you decide is best for your business, keep in mind that you must be consistent! After all, these records are not just for you but are the framework for your reporting to the IRS. Also be aware that if you start with one accounting method and would like to change later on, you must seek approval from the IRS.

Reporting your taxes can be daunting – let Frontline Property Management do the heavy lifting! Our accounting department tracks your general ledger, sends you monthly reports and even files the taxes for your properties so that you don’t have to!

Learn more about our services to find out how Frontline takes the hassle out of property management!

Let us know if you need help with your rental!

Property Management Accounting: The Basics

Your rental property is an investment. You will put your time, energy and money into it – so you will want to see a return on that investment. Combined with active and informed property management, accurate accounting gets you what matters most: your bottom line.

Use our Property Management Accounting Tips to track your profits, organize your books and better manage the finances of your rental revenue!

Create Separate Bank Accounts

In a new age of contactless transactions and long-distance bill payments, if you weren’t already using online payments to collect application fees and rent payments – now is the time! A benefit of e-payments has always been that funds get deposited directly into your account. However, in operating a business, you will need to treat it as one. This means opening separate bank accounts. In fact, you should open at least two to begin with: one for the property you’re managing, and one for tenant security deposits (for reasons we’ll discuss later on in this series).

Every financial transaction for the property will need to be made with its associated account. All income (fees, rent) is deposited and expenses (maintenance / repair, make ready, et al) are paid from the same place, making it easier to track – which the IRS requires. You won’t be relying solely on your bank statements to track the debits and credits to this account – this is just the tip of the iceberg! Keeping the funds separate is the first, and simplest, step to taking your bookkeeping to the next level.

Can I Spend the Money in My Business Account?

Yes! Rent is income, after all! You will need to just “pay” yourself by moving funds from your business account to your personal one. Remember, you will be logging these transactions as part of your accounting process and that’s why you should never spend miscellaneously from your business account, but by all means collect your revenue.

Tip: Keep a “reserve” of funds in your business account for each property. This is a set amount of money that you have set aside for emergency use, deposited into the business account. A reserve acts as a buffer to your personal funds in case you have already paid yourself when a sudden repair is needed on your investment property. Most Property Management Companies require this reserve as well – it’s definitely in your best interest to have!

Should I Create a Bank Account for Every Property I Own?

This is up to you. The better your bookkeeping, the less likely it is that creating multiple bank accounts provides more of a benefit than one well-managed bank account. With accurate accounting, built-in redundancy, and thorough record-keeping, you can operate your entire portfolio out of one bank account. (Remembering to keep security deposits in a second, separate, bank account.)

Tip: Property Management Companies like Frontline Property Management have a dedicated Accounting Department that houses years of experience with detailed accounting. If thinking about general ledgers, double-entry bookkeeping and cash vs accrual accounting is already making your head spin – don’t worry! It’s what we’re here to do!

Bonus Tip!!!

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