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How to Manage Your Property
Manager
A foolish property owner and his money are soon parted!  Rental property
owners who
hire property managers or property
management companies to manage their real estate investments should
always adopt a few simple internal controls to ensure compliance with
their wishes. Property managers typically collect the rents, pay
the bills, oversee repairs and maintainence of the properties, find and
qualify
tenants as well as evict delinquent tenants, etc.; however, many fail
to perform
these and other functions expected by the owners in a faithful and
timely
fashion. In particular, as a Certified Public Accountant, I am
surprised to witness how many property managers fail to make an
accurate and regular accounting of their fiduciary responsibility to
the owners or investors of the properties.Property owners should expect and receive monthly reports from their property managers. Typically the reports should include the following: 1. Monthly profit and loss statement; 2. Tenant receivables report; 3. Accounts payable report; 4. Bank reconciliation (if the property manager has a checking account for the properties); 5. Copy of the monthly bank statement. When capital improvements need to be undertaken, often the property manager is entrusted to function as the construction manager of the work. Consequently, additional reports would be required. For instance, they may include: 1. Work-in-progress schedule; 2. Bank reconciliation for the capital improvements transactions; 3. Copy of the monthly bank statement for the capital improvements account; 4. Cash flow projection for the remaining improvements. Property management companies often have many clients and after paying lip service to boasting about their excellent service, after you sign a property management agreement, you often find them failing to follow up on these reports. Sometimes you find bills for services without sufficient substantiation, if not unreasonable or questionable in amount. Or you may find your property management fees more than what was originally agreed upon, since the fox is in essence guarding the hen house. Therefore, as an owner, you must always be vigilant and maintain control over the property manager. Remember you own the properties and you are always the boss and ultimately in charge. The most effective means of ensuring control over the management of your properties is to maintain control over the cash. But you may wonder how can you control cash if you want your property manager to collect the rents and pay the bills? Easy. Set up at least three bank accounts: an operating bank account, a securities deposits bank account and a rental receipts bank account. The property manager would have unlimited access to the operating bank account in order to pay the customary expenses of operating and maintaining rental properties. However, no deposits from rental receipts, late fees, or other miscellaneous sources would be permitted to be made to this account for operations. Rather, all rental receipts and other sources of income would be made to the rental receipts bank account, from which only you would have access to make withdrawals or transfers. After receipt and review of monthly reports, bills, requisitions, etc., from the property managers, you would simply transfer sufficient funds from the rental receipts bank account to the operating bank account to authorize the payment of those invoices approved by you. Typically security deposits are required by state law to be escrowed in a separate bank savings account where interest is earned. Again, property managers would deposit all security deposits into these accounts and only you would have access to these accounts for any withdrawals or transfers. In some states you may be required to have individual securities bank accounts for each tenant. Check with your attorney and state law for further guidance on this requirement. If significant capital improvements are to be undertaken, it is advisable to have a separate bank account for these expenditures as well. Again, only the owner should have access to this bank account in order to transfer monies to the operating bank account after the work has been approved for payment. As with any construction work, purchase orders, contracts, requisitions for payment, certificates of insurance, Form W-9, invoices, inspection reports, etc., should be received, reviewed, and approved by property owners before transferring any monies into the operating bank account for payment of any capital improvements. By establishing separate bank accounts for operations, receipts, deposits, and improvements, and by only allowing the property manager access to those of operations—and only after receipt of monthly reports and documentation supporting all expenditures of significance and interest—owners can exercise more control over their property managers and their investments. Moreover, a quick glance at your current balance in each of these accounts can often tell you if and how well receipts and security deposits are being collected as well as how much funds have been expended in improvements to-date. By requiring and receiving accurate and timely monthly reports, property owners may avoid unnecessary expenses and losses and enhance their survival during these very difficult economic times.. If you have any questions about the controls that you as an owner of real property should initiate and establish in regard to your property managers, consult your certified public accountant, or contact us: Accountants CPA Hartford, LLC. We would be happy to assist you. This article is provided for informational purposes and is not intended to be construed as legal, accounting, or other professional advice. For further information, please consult appropriate professional advice from your attorney and certified public accountant. Have a tax or an accounting question? Please feel free to submit it to William Brighenti, Certified Public Accountant, Hartford CPA Accountants. For information and assistance on any tax and accounting issue, please visit our website: Accountants CPA Hartford. If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. The above tax advice was written to support the promotion or marketing of the accounting practice of the publisher and any transaction described herein. The taxpayer recipients of this offering memorandum should seek tax advice based on their particular circumstances from an independent tax advisor. |
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| Supreme Court Justice George Sutherland: "The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, by means which the law permits, cannot be doubted." |
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| British Chancellor of the Exchequer Denis Healey: "The difference between tax avoidance and tax evasion is the thickness of a prison wall." |
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of an "accountant": someone who solves a problem you didn't
know you had in a way you don't understand. |