Accounting for Property Managers: A Comprehensive Guide

Owais Shamsi CPA Owais Shamsi CPA March 12, 2024

Managing property finances is more intricate than handling individual or business accounts. Precise property management accounting plays a vital role for various reasons.

Firstly, it aids in monitoring your financial situation and spotting opportunities to save money or boost revenue. Secondly, it ensures adherence to tax laws, preventing expensive penalties. Lastly, it equips you with the insights needed to make well-informed business decisions.

This comprehensive guide will simplify property management accounting for you, making it easy to grasp and implement.

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Table of Contents

What is Accounting for Property Managers?

Accounting for property managers, also known as real estate accounting, involves managing the financial aspects of a collection of properties owned by a single individual or a real estate company.

Understanding Property Management Accounting for Investors

Property management accounting is all about keeping tabs on the money side of owning and running rental or association properties, including any income or expenses tied to the property or your own business. It is an important part of property management because it helps you stay on top of your finances, make smart decisions, and stick to the rules of tax laws and regulations.

Accounting in property management is a specialized field focused on handling the money aspects of owning and running rental properties. It involves tasks like:

  • Financial planning
  • Tax planning
  • Payroll processing
  • Keeping financial records
  • Getting rent payments
  • Tracking expenses
  • And preparing financial statements.

Getting the numbers right is crucial for property managers to make good decisions about their business and follow the rules of tax laws and regulations.

Property Management Accounting
Portfolio Accounting

Accounting for Portfolio Managers

Portfolio accounting is like keeping an eye on how well each investment in your collection of stocks is doing. It involves checking which investments are doing well and which ones might need some changes, like adding more or reducing. The goal is to make sure your collection of investments matches what you’re comfortable with in terms of risk and meets your expectations for growing your money. So, it’s like managing your group of investments to make sure they’re working the best for you.

Accounting for Investors

Investment accounting is a specific type of accounting that concentrates on keeping tabs on and overseeing investment-related transactions. Usually, investment accountants are employed by financial institutions like banks or credit unions. However, they might also work independently or as part of an advisory firm.

Investment Accounting

Top 15 Terms for Property Management Accounting

These are the 15 must-know terms for property management accounting. Let’s get started!

Property Management Accounting

Accounting Period

An accounting period is a timeframe covered in a financial statement, often spanning one or more days, months, or years. If you have ever generated a report in QuickBooks for property management or similar accounting software to check your income, costs, or other details, you will notice that each report is based on a specific accounting period.

Accounts Payable

Accounts payable is the amount of money your business owes to vendors. It typically involves payments for products or services that you use to operate your business, like the bill for a contractor fixing a property.

Account Receivable

This is the money you are currently owed for your services. It includes any outstanding invoices, unpaid fees, or rent balances.

Accrual Accounting Method

This property management accounting method records transactions based on the date they occur, regardless of when the payment is made or received. It is mandatory for any business with employees to use this accounting approach.

Asset

An asset is something owned by the business that holds value. The most apparent examples are the properties owned, but it can also encompass cash deposits, land, and the money owed to you (accounts receivable).

Bank Reconciliation

It is important to regularly verify that your general ledger aligns with the actual balance stated in your business bank accounts. This verification process is known as bank reconciliation.

Bookkeeping

Bookkeeping in property management is essentially the same as business accounting; it involves recording the transactions that form the basis of your business’s accounting data.

Cash Accounting Method

The cash accounting method logs transactions when they are paid or when payment is received, depending on whether you’re settling a bill or getting paid by a tenant. This method is commonly used by sole proprietors, especially in the early stages of managing their accounts. However, it is important to note that businesses with employees are mandated to use the accrual accounting method.

Depreciation

Depreciation is a way to measure how the value of an asset decreases over time. For instance, if you buy construction equipment for property development, its value will go down each year due to different factors. Keeping track of the actual depreciation numbers is important, as it might be eligible for tax deductions, depending on the item.

Equity

Equity represents the value or ownership stake in the business. If you’re the owner, your equity is calculated by subtracting your liabilities from your assets.

Expense

Expenses represent the costs incurred in the operation of a business. Like depreciation, they impact the overall financial health of your company.

Financial Statement

A financial statement is not a single document; rather, it encompasses any report providing information about the financial well-being of a business. Examples include balance sheets, profit and loss statements, and income statements. When a lender or auditor requests financial statements, they usually specify the particular report they require.

General Ledger

Your general ledger (GL) is a comprehensive log of all your business transactions.

Liability

A liability is a debt or obligation that a company owes. Examples of liabilities include accounts payable, mortgages, payroll obligations, and loans.

Revenue

Revenue is the income earned by your business during a specific period. For instance, if you’re a landlord and receive payment from a tenant (or if you’re a property management company and receive payment from a landlord), that amount is considered revenue.

How to Set Up Your Property Management Accounting

Property Management Accounting Image

Now that you grasp the key property management accounting terms, it’s time to establish a robust accounting system for your business. Follow these steps to guarantee precise and efficient financial management:

Determine Your Accounting Needs

Evaluate the complexity and size of your property management business first. This will help you decide the appropriate level of accounting system needed. If you handle just a few properties and transactions, a simple spreadsheet or basic accounting software might be enough. However, for larger operations, think about investing in specialized property management accounting expert.

Choose Your Accounting Method

There are two main property management accounting methods:

Cash Basis Accounting

In cash-based accounting, you record transactions as soon as money is received or sent, whether for your services, property sales, or contractor payments.

For example, if a tenant pays you $1,500 rent for September, you would enter that amount in your accounting program right away. This method is straightforward and intuitive, making it a common choice for sole proprietors. However, it might change when you have employees on payroll.

Accrual Accounting

With the accrual accounting method, transactions are recorded when they occur. If a tenant pays rent for the month, you record that transaction in that month. However, if a tenant pays several months upfront, you would only enter this month’s rent as a transaction, even if the funds are already in your bank account.

Choose Accounting Service

Select property management accounting services that cater to your specific needs. Look for software with features like rent tracking, expense management, reporting, and integration with tools such as tenant portals and online payment systems.

Set Up Individual Property Accounts

Create separate accounts for each property managed using your accounting software. This allows for the tracking of income, expenses, and other financial details unique to each property.

Establish a Chart of Accounts

Develop a chart of accounts to categorize financial transactions effectively. This organization ensures accurate record-keeping and simplifies the reporting process, encompassing categories like revenue, expenses, assets, liabilities, and equity.

Implement Rent Roll Management

Create a rent roll, a spreadsheet tracking rental income for each property and tenant. Include details like tenant names, rental amounts, lease terms, and payment history to monitor rent payments and identify any delinquencies.

Automate Rent Collection and Invoice Payments

Leverage your accounting software to automate rent collection and invoice payments. Set up online payment options for tenants, streamlining the process and ensuring timely payments, reducing manual effort, and minimizing errors.

Perform Monthly Bank Reconciliations

Regularly reconcile bank statements with accounting records to ensure accuracy. Identify and rectify discrepancies promptly to maintain financial integrity.

Generate Financial Reports

Hire a property management accountant to generate essential financial reports such as income statements, balance sheets, and cash flow statements. These reports offer insights into your business’s financial health and performance.

Seek Professional Assistance for Taxes

Engage the services of a professional accountant or tax advisor for annual tax preparation. They ensure compliance with tax regulations, identify deductions, and optimize your tax strategy.

Review and Analyze Financials Regularly

Consistently review and analyze financial statements to gain insights into your property management business’s performance. Identify areas for improvement, track profitability, and make informed decisions based on financial data.

Reporting and Financial Statements for Property Management

Financial Reporting Image

Reporting and financial statements are key tools in property management accounting, offering valuable insights into your business’s financial health and aiding informed decision-making. Here are some essential reports and financial statements to familiarize yourself with:

Balance Sheet

A balance sheet provides a snapshot of your business’s financial status at a specific point in time, displaying your assets, liabilities, and equity.

Income Statement

An income statement reveals your business’s revenue and expenses over a specific period, offering insights into your financial gains or losses.

Cash Flow Statement

A cash flow statement illustrates the movement of cash in and out of your business during a specific period. It helps gauge available cash for bill payments, property investments, or owner distributions.

General Ledger

The general ledger maintains a record of all financial transactions in your business, detailing each transaction’s date, amount, account name, and description.

Best Practice for Property Management Account

To enhance the efficiency and accuracy of your property management accounting, consider incorporating the following best practices:

Analyzing Cash Flow

Analyzing Cash Flow

Analyze your property management business’s cash flow regularly to ensure financial health. Monitor rental income, expenses, and cash reserves to maintain a positive cash flow and plan for future investments.

Hiring an Accounting Expert for Efficiency

Hire a property management accounting expert to streamline processes and save time.

Managing Your Property Ops and Administrative Accounts Separately

Keep administrative expenses separate from property-related costs by maintaining distinct accounts. This ensures accurate record-keeping and facilitates better financial analysis.

Maintaining an Accurate Rent Roll

Hire a property management accounting expert to streamline processes and save time.

Managing Property Ops
Optimizing Your Chart of Accounts

Optimizing Your Chart of Accounts

Review and optimize your chart of accounts regularly to align with evolving business needs. Avoid unnecessary accounts and consolidate where possible to simplify financial management.

Reviewing Financial Performance

Annually review your property management business’s financial performance, focusing on key metrics such as capital appreciation, rental cash flow, tax benefits, and debt reduction. This evaluation informs decisions about property holdings and potential sales. Implementing these best practices enhances the efficiency and accuracy of your property management accounting processes.

Reviewing Financial Performance to streamline processes and save time.

Staying Updated on Lease Types

Stay informed about various lease types, especially triple net (NNN) leases common in commercial real estate. Understand responsibilities regarding common area expenses and ensure accurate billing to tenants.

Tracking Deductible Expenses

Monitor deductible expenses tied to property management, such as maintenance, repairs, and professional fees. Accurately recording these expenses maximizes tax deductions.

Tracking Deductible Expenses to streamline processes and save time.

Lease Agreement

Frequently Asked Questions

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Property management accounting is crucial as it helps in maintaining financial accuracy, tracking income and expenses, and ensuring compliance with tax regulations.

A property is typically considered an asset as it holds value and can be used to generate income or sell for profit.

The four types of assets are current assets, fixed assets, tangible assets, and intangible assets.

Conclusion

Effective accounting is the cornerstone of successful property management. This comprehensive guide has equipped property managers with essential techniques to navigate the intricacies of financial tracking. By emphasizing accuracy and strategic management, you can ensure the financial health of properties under their care. From mastering budgeting and reporting to understanding tax implications, this guide serves as a valuable resource for achieving sustainable success in property management. As the real estate era evolves, the insights gleaned from this guide will empower property managers to make informed decisions, foster positive tenant relationships, and ultimately thrive in a dynamic and competitive environment.

Areas Served By CPA Owais Shamsi

While our clients are located all over the United States of America, most of our clients are concentrated in Dallas in the following 4 cities because of our in-person presence in audit engagements.

Dallas

Austin

San Antonio

Houston

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Email: oshamsi@oscpatax.com

Call: 214-253-8515

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