Property Management Accounting

By Salvatore Friscia, San Diego Premier Property Management, San Diego, CA

For property management companies, the month of January signals a time to prepare and issue year end statements to their clients for tax preparation purposes. Consequently, each January the IRS requires that any taxpayers who have made payments in excess of $600 to workers that are not considered employees must prepare Form 1099 – Miscellaneous Income. Property management companies are also federally required to file Form 1099 for their clients regarding rental income received throughout the year. In addition, copies of this completed form must be provided to the IRS. The IRS compares the payments shown on the information returns with each recipient’s income tax return to determine whether the payments were reported as income and done so properly.

By Steven Van Zile, Total Management, New York, NY

Within the past 24 hours, here are the maintenance issues I’ve experienced at the property where I reside: the maintenance person, loyal to this building for 33 years, responds to a clogged toilet by advising us to pour bleach down the toilet. Concurrently, the intercom buzzer is stuck and won’t shut off. And, of course, the elevator renovation that started out as a one week project actually turned into a three week project, providing 6^th floor tenants the opportunity to save money by cancelling their gym memberships.

It’s always seemed simple to me; as residents, we pay rent, maintenance fees, or mortgage payments and the property management staff provide services for the resident. Building and trust owners hire those property managers based on their abilities to keep churn rates low, vacancy at zero, and tenants happy all at or below a budget designed to re-invest in the property. So what happens when we tenants aren’t happy? Well, in today’s age of instant knowledge and access, a lot of renters turn to rating sites like Yelp or apartmentratings.com to spitefully pen scathing reviews in an attempt warn others. These sites might be seen as a threat, but if you’re really good at your job, more transparency can only help you, and reviews will actually help your business grow.

Let me begin by wishing you all a very Merry Christmas and Happy Hanukkah. For those of you who regularly read my scribbles, you are used to some pretty meaty topics. In light of the Holidays, this one will be a bit frothier. In each blog that I write there are certain themes which remain pretty consistent. One of my favorites is that real estate development is about the coolest industry on the planet. After all, our job is to make the world a better, more usable, more beautiful place.

Often my intended audience is the real estate developer (my hope is of course that there is some part of my subject matter which translates to my non-developer audience- or at least helps you better understand those temperamental developers who constantly tell you ‘We can’t afford that.’). Today, I would like to remind us all of something that is very easily glossed over as we perform our day-to-day tasks.

By Salvatore Friscia, San Diego Premier Property Management, San Diego, CA

A vital part of reducing cost when managing a rental property is limiting the expenses associated with tenant turnover. Tenant turnover usually requires the rental property to be professionally cleaned, painted or touched up, and carpets cleaned or replaced. In order for you to know what expenses to absorb and what expenses to charge back to the tenant, you should always know the current condition of the property as well as the condition in which the property was given to the tenant.

To accomplish this, each tenant should be provided with a written “Move-In/Move-Out” checklist. The “Move-In/Move-Out” checklist allows both parties to identify in writing the initial “Move-In” condition and the final “Move-out” condition of the property. These checklists will eliminate any misunderstandings regarding which party will pay for non-normal wear and tear repairs throughout the tenancy and upon move out. Prior to giving the keys to the tenant the owner should completely inspect the property and document the existing condition on the “Move-In” side of the checklist. It is necessary to document the condition of the appliances, windows, screens, blinds, doors, walls, lighting, flooring, a/c, heating, toilets, faucets, ceiling fans, and any other necessary interior and exterior areas. During the initial walk-through with the tenants, it is important to review the findings with the tenant and have the tenant sign and date the document.

By Salvatore J. Friscia, San Diego Premier Property Management, San Diego, CA

Every property owner should require tenants to issue a refundable security deposit which is held on file to insure against non-performance of the lease agreement. Non-performance may be, but is not limited to, anything from damages occurring during occupancy to expenses accrued due to the tenants conduct or failure to pay rent.

The confusion begins with the property owner not knowing how much to require the tenant to issue for the security deposit. It is important to understand that security deposits for residential properties are controlled by statute and call for nondiscriminatory  and equal treatment. It is a prohibited discriminatory practice to charge a family a different amount then an applicant without children. It is also prohibited by law to require an excessive amount for the security deposit. In addition to collection of one month’s advanced rent, the maximum security deposit allowed (at least in the state of California) for an unfurnished unit is two months rent and three months rent for furnished properties. [California Civil Code 1950.5(c)] Check your local area laws for similar guidelines in your area.

By Salvatore J. Friscia, San Diego Premier Property Management, San Diego, CA

If you own multi-family rental property in the southwestern United States you should know about RUBS (Ratio Utility Billing System). A large majority of multi-family rental properties in California, Arizona, Nevada, and NewMexico are individually metered for electric but have what’s called a “master” meter for water. The electric usage of the tenant is paid for by the tenant and the water and sewer usage for the entire complex is typically at the owner’s expense. This expense can be rather costly and eats into the NOI (net operating Income) of the property producing a negative effect on the value of the asset. Most industry experts foresee prolonged price increases for water consumption as the areas mentioned above are currently dealing with drought and long-term water conservation concerns. To mitigate this expense savvy investors have typically reduced water consumption by the installation of low flow toilets, low flow shower heads, and landscaping of indigenous plants or desert landscaping in common areas. While this helps reduce cost it doesn’t eliminate it and the owner is still burdened with an expense that continues to outpace reduction methods. Some owners have gone as far as installing sub-metering on each individual unit if the property’s current piping system allows it. This would seem to be the best solution but once again this is only feasible if the properties current piping system will allow you to make these changes. All of these methods are helpful and will curve water consumption and the cost associated with it but unfortunately all of these methods also require an initial capital investment by the owner to implement. Depending on the size of your property, this initial capital expense could be significant — sub-meters can cost anywhere from $200-$400 per unit not including installation fees.

The RUBS (Ratio Utility Billing System) uses an allocation formula that divides a property’s water bill among its residents based on square footage, number of occupants, or some other quantitative measure. It allows the owner to recover a substantial portion of the water and sewer cost by proportionately allocating the costs amongst the tenants. To implement RUBS it is recommended that an owner give monthly notices for at least 6 months to all tenants about the new program. This will give adequate time for the tenants to absorb the changes and understand the new cost associated with the billing. Studies have shown that the loss of tenants will be minimal and the cost associated with the savings from the program will outweigh any short-term vacancy bumps.

Every now and then, a tenant offers to make repairs to the unit he’s living in. Often, such offers are made in exchange for rent (in other words, the cost of the repairs is deducted from the monthly rental rate). In other instances, the tenant simply wants certain upgrades in his unit (a new paint job, removed carpet, etc.) and offers to do them himself. The argument for this is that the tenant can enjoy a place that “feels like home” and you reap the rewards of these upgrades once the tenant vacates the unit.

Clearly, there can be benefits to this sort of situation: You receive property upgrades at a reduced (or negated) cost, and your tenant gets to customize the unit to his own preferences. Unfortunately, though, there can also be some pitfalls. All too often in these scenarios, tenants are not qualified to complete these upgrades or updates up to par. The result is unfinished or sub par work that ultimately becomes your responsibility to rectify.

Not only this, but such deals can also result in sticky financial situations and—in extreme situations—legal problems. Let’s say that one of your long-time tenants wants to repaint his living room from the standard white all of your units are painted in to a more colorful rustic red. You agree that the color would suit the space well and tell your tenant can deduct the price of paint and labor from his next rent payment.

There’s no doubt about it—of all the business problems you could potentially have, being too busy is certainly not a bad option. However, being too busy can become a problem if you lack the bandwidth to stay on top of things. If you consistently find yourself putting off certain tasks or letting them fall through the cracks altogether, it’s time to make some changes. Being overloaded can result in a slip in the quality of the service you provide or oversights, both of which may guarantee you’re not so busy for long.

The obvious answer to too much work is bringing more hands on deck. But, of course, just because you’re busy doesn’t necessarily mean you have the budget to hire additional employees. Property management software may give you the extra help you need at a lower cost than an additional salary.

Multi-tasking Functionality
One of the great benefits of property management software is that it essentially acts as an office generalist. For example, hiring extra staff to take care of accounting work may alleviate that workload, but that same person can’t necessarily take on other tasks such as advertising. Modern property management software, on the other hand, handles a diverse variety of functions. It does accounting, allows tenants to make rent payments online, provides an advertising platform, runs credit and criminal checks, creates reports, and keeps records.

The business entity you choose for your property management company will affect you in very real ways—especially when it comes to taxation and financial and legal liability. This is a big decision and one that you may want to make with the assistance of your accountant or attorney. Following are the four business entities most commonly used by property management companies and some basic information about each.

Sole Proprietor
The title of this business designation pretty much says it all—a sole proprietorship is a business owned by one individual. Unlike more complex options, sole proprietorships do not have to be legally registered with the state you do business in. Rather, a sole proprietorship’s existence is solely based on the fact that you’ve gone into business. In other words, it’s simple and free to set up.

Sounds too easy, right? Well, there is a drawback. Because you are one and the same with your business, business gains and losses are filed on your personal tax forms and, most notably, you are liable for the business, both financially and legally.