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Property Management Accounting: One or multiple real estate trust accounts?

A question that we – as a property management firm – are constantly asked by prospective new clients is “How do you reconcile the trust account against all the checks and bills that come in and out of your office each month? How can we be sure that our money is being properly accounted for?”

 To us, the answer seems very simple:  each new client is set up with two new trust accounts once they sign a property management agreement:  An Operating and a Reserve account.  Security deposit monies that are collected from residents at move in are deposited into the Reserve account and not touched until that resident moves out again.  Monies that are collected as rent are deposited into the Operating Account and used to pay bills, vendors, owner distributions, etc.  At the end of each month, each account is examined and reconciled.  True, this adds a bit more work for our book keepers, but the reconciliations at the end of each month end up being very precise. 

In California it is legal keep every client’s rental and deposit monies in one single trust account – but to me that seems like an accounting nightmare.  One account would save on bank fees and back end set up time, but that seem like a small price for being able to show our clients a bank statement at the end of the month with their specific account and accounting info.  If we employed the single-trust fund method, our clients would never – in my understanding - be able to see such an account statement due to the fact that  funds from 100 other properties would also be represented in this account.

I would like to know other landlords thoughts on this - Are we going to too much trouble with this approach?  Does one massive real estate trust account work?

-Trevor

Trevor Henson is a managing partner of First Light Property Management, Inc located in Los Angeles, Ca.Property management

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Maintaining separate accounts for each client is law in Illinois and makes much sense. Everything is tracked separately and distinctly. A client's funds are separate, along with invoices, and rent payment deposits. I could not imagine it any other way. Our system is done by numbers and coding things accordingly. For instance, each address includes a Property Number. When we receive correspondence or anything, it references that number. If we receive an invoice and it is not referenced, the invoice is returned so the vendors know to address them to the proper client. The deposits are all separated as they arrive at the lockbox in the same fashion. We receive constant lockbox upload files that are also segregated. The uploads are imported to the property number it is associated with. Our world is about the Property number and for the most part it works just fine. At the end of each month the bank statements are reconciled so we have accurate cash balances tied out for our clients. All things are reconciled and accounted for on an account by account basis. Nothing is commingled.
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  Linda Day Harrison, CPM, CCIM
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Hi Linda-
Great to hear from an out of state company. Interesting system you have with the property ID numbers (we use addresses) - do you use an online solution to manage the properties and the subsequent ID number?

  Trevor Henson
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Hi Trevor,

I think choosing a path is as much related to your accounting package as it is to the business process. In many Property Management solutions that have strong accounting you will find that each property is it's own ledgered entity, regardless of whether you have one or many bank accounts.
Thus, depending on certain particulars of course, it is possible to have a single trust account but still report accurate balances to individual owners on a prop. by prop. or aggregate basis as necessary.
There can also be specific benefits to you in doing this in the form of discounted or even free services from your primary bank, or even earnings credits from your bank that can be applied to certain operational or administrative expenses.

  Luke Scala

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