As a landlord, one of the many things that you need to do, is to stay on top of your revenue & expenses; in other words be a pro at property management accounting. Ever so often as property owners you may be intimidated by the jargon related to property management accounting be it rent ledger, rental property bookkeeping or high fidelity property management. In this guide we will offer you several tips that will help you set up your property management accounting system without being daunted by it.
How to set up a property management accounting system
#1. Determine the accounting approach
Property management accounting essentially involves choosing one of two approaches, namely cash or accrual accounting.
Cash accounting– As the name suggests, in this approach you need to record every single cash transaction from rent receipt to any service provided to the tenants. This approach involves recognizing revenue & expenses at the time they are received or paid.
Accrual Accounting– This method involves recording transactions as opposed to when money is received. Essentially in this approach, revenue and expenses are recorded at the time they are “earned”, regardless of when the money was actually received or paid.
As an example, if your tenant pays you advance rental for the next 12 months, you only record the transaction for each month if you are going by the accrual accounting method.
#2. Having an Accounting Software in place
Especially if you deal with large properties, what you need to invest in, is a multifamily accounting software. That way you will ensure that even if you have a lot of balls in the air, nothing can slip through the cracks. With an accounting software in place, you can automate as also reconcile your finances with ease. There are a number of accounting software available today. Your bespoke requirements & budget will help you make the right choice.
#3. Ensure you have the following aspects in place for each property
- Entity
- Separate Accounting Systems
- Separate Bank Account or Credit Card
- Individual General Ledger & Chart of Accounts for each rental property
This way you will be able to evaluate the profitability of each rental property individually.
#4. Monthly accounting cycle
With a robust accounting software program in place, it will be easy to undertake aspects such as set up automatic monthly invoices with ACH payments, processing invoices, bank reconciliation, and more.
In addition to the above aspects, setting up of a successful accounting system for property management involves paying due attention to the following:
- Link your accounting software to the bank account for every individual entity.
- Undertake an annual property appraisal, be it through getting a Broker’s Price Opinion or undertaking your own valuation. That way you will be sure whether or not you should hold the property.
- Undertake annual financial analysis on various metrics such as Capital appreciation, Rental Cash Flow, and Tax Deductions. It is your final cash flow statement that will give you an overview of how well the property is performing.
- If your lease type is the Triple Net Lease, it implies that tenants need to pay for common area expenses. You therefore need to make sure that the tenants are billed accordingly.
- Ensure you keep an updated rent roll i.e a statement that shows the rental income from your real estate assets. This not only helps you identify any tenants who aren’t making timely payments, the rent roll will also come in handy if you want to avail a loan on the property.
To Sum Up
With robust property management accounting you can achieve many things including but not limited to:
- Evaluate how much profit each property is making
- Make sure your expenses are recorded accurately
- Evaluate the viability of the property
Manage Your Property Management Accounting With BFPM
As an apartment owner if you find property management accounting stressful, here is help. At BFPM, we have over 2 decades of property management experience that allows you to effortlessly keep a close eye on your property’s financial health. With our experienced personnel, you are fully covered.
To know more, get on a quick 15-minute consultation call with us. We will be happy to guide you.
Trevor Henson
Trevor Henson is an experienced entrepreneur (10+ highly-successful start-ups) and property investor with a demonstrated history of building and leading teams in investment property management environments, maximizing returns for property owners, and optimizing properties through construction management and re-positioning. He…Learn more about how we can help. Customized solutions for large portfolios!