The North American property management market is currently valued at $5 billion. Though there are many advantages to owning and renting real estate, it’s not without its challenges.
Property management accounting, for instance, is more complex and challenging than accounting in other areas of business. When faced with a multitude of complicated tasks like managing several clients at once, processing high-volume transactions, and constant handling of assets, income, and expenses, there is plenty of room for costly errors.
Below, we’ve listed some of the most common challenges with property management accounting and strategies you can use to overcome them.
1. Misclassification of Costs
There are myriad costs associated with property management, and one of the biggest mistakes we see is firms misclassifying their finances. Maintaining clear and detailed financial records is imperative to keeping your business functioning smoothly and by the books. One way to keep your costs organized is by creating a chart of accounts that is essentially a catalog of all your business assets, liabilities, equity, income, and expense accounts. That will keep your transactions orderly and easy to assess.
2. Paper Invoices and Receipts
Relying on paper when it comes to your business accounting is not only risky but also very disorganized. Paper records can easily get lost or misplaced in the wrong files, leading to errors that could unbalance your books. While you may not be able to rid your firm of paper completely, digitizing important documents is imperative now, especially if you have several clients. This way, you and your team can easily access the files you need and keep the office tidy.
3. Returning Security Deposits On Time
Depending on the regulations in your state, not returning a security deposit to your renter on time could lead to costly legal fees and further problems for your business. It’s vital that your accounting department is on schedule with client-related payments. One way to avoid a late deposit return is by automating the payment on a certain date with specific parameters so that tenants only receive their payment when they’ve met all of their rental move-out requirements.
4. Homeowners’ Association (HOA) Payments
Late payments to your HOA are another way your firm could be put at risk. Depending on where your properties are, your local HOA can stick you with steep fines and even lawsuits that could put you out of business. The solution here is simple—set up automatic recurring payments. That way, no matter how busy things get, your payments will be made at the same time every month.
5. Account Reconciliation
In any type of business accounting, you should maintain accurate records at all times. Avoiding regular account reconciliation is one sure-fire way to get your business in trouble. So it’s a good idea to get in the habit of reconciling your books at the end of every month. This way, you can go through your financials in smaller chunks and catch errors before the end of the year.
6. Lack of Internal Audits
No business revels at the thought of conducting an internal audit, especially not those in the property management sector. However, conducting audits can be beneficial for many reasons. They help identify areas of your business that need to be improved by tracking workflow. Audits also create transparency throughout your company, offering more opportunities for accountability. Every business should perform an internal audit at least once every few years.
7. Duplicate Bills
As we mentioned earlier, paper invoices can wreak havoc on your accounting processes. One of the potential errors we see several firms making is duplicated bills. Whether you’re double-paying a vendor or client, or you’re getting double-charged by something like the HOA, things can get messy, and your books will be riddled with accounting errors. More often than not, duplicated bills aren’t discovered until you’re trying to reconcile your books, and by then, it may be too late to contact a vendor or former tenant.
8. Combined Bank Accounts
One of the biggest mistakes business owners make, particularly in real estate, is using one bank account for business and personal expenses. This is a big no-no. Using one bank account makes it extremely challenging to evaluate your business profits and expenses, which can cause errors when reconciling your books. In addition to making your finances a mess, you could also get into legal trouble if your business gets audited by the IRS.
9. Record Maintenance
Keeping detailed financial records isn’t always seen as a priority in property management, but it’s vital for the future success of your business. Record storage and organization may not be the most glamorous task, and it can be extremely time-consuming, but the work will pay off. In fact, many firms will outsource this task to an automated software program that keeps a detailed catalog for them. Maintaining clear financial statements regarding your business expenses and profits can come to your rescue if you’re ever audited or have a dispute with a tenant. You’ll be able to cite real documentation and access it quickly.
10. Choosing the Right Accounting Software
We’ve mentioned automation and outsourcing several times throughout this article, but how do you choose the right software to accomplish these tasks for your business? It’s important to do your research and find a program that’s tailored to meet your specific needs. Many firms will pick the first accounting software they find or that’s recommended to them by a friend in a different industry. However, choosing a general accounting software can often lead to frustration when the program doesn’t have the unique capabilities required for property management accounting.
At PABS, we are known to provide simplified and streamlined solutions for all sorts of accounting and bookkeeping needs, including all the aforementioned challenges. We cater to small businesses across multiple industries, bringing about impactful change for you and your team and giving you one less thing to worry about.
Interested in learning more about property management accounting? Contact us today!