Accounts for Property Management Standards?

Question

I am currently in the process of negotiating with a property management company to manage a multi-family rental and I'm curious about how others in the BP community structure their accounts. Can anyone advise on whether these are fairly standard practices for the accounts managed by the PM company? (This property is in Indiana)

Operating Account:

- Trust fund account set up by the owner with property management company as trustee

- Collected rent is deposited into the operating account, including checks made out to owner per tenant lease

- This account is used to pay expenses, management fee, loan payments, taxes and owner distributions

- This account to maintain a minimum amount for property management to use for operations

Reserve Account:

- Trust fund account set up by the owner with property management company as trustee

- Holds tenant security deposits

Thanks for your feedback/guidance.

Robert Gilstrap · Answer

Alex,Property Managers almost universally control the flow of money in and out. THey are required by law to setup trust accounts for cowner/tenant money being held.You should expect the rents to be paid to the management company and those funds deposited into a trust account. All bills including management fees will be paid out of that account and the balance of funds (minus any minimum reserve amounts) will be paid out to you each month. Tenant security deposits are typically held in a separate trust account although many states allow them to be held in the same aforementioned trust account as the rents.You would always be required to hold some minimum amount of money in the account for maintenance reserves, etc.This stuff where you setup the account with them as trustee is completely foreign to me and just adds unnecessary complexity. That being said perhaps Indiana law requires a specific setup. I would check with a couple more just to be sure.

William Hochstedler · Answer

So you are the property owner and are looking how to handle property management disbursements?If that's the case, you really only need a dedicated account (or bookkeeping to simulate this) in which disbursements and certain expenses (like taxes, insurance, and capex) are recorded.If you are asking whether the property management's bookkeeping is standard, this is a much bigger question.I can't imagine that a legitimate PM would have an individual trust account for each owner. Typically, a property management company has a Trust Account used for all third party monies. All rents and property expenses are run through this account on behalf of the owner. One of these expenses is the management fee paid out of this account to the management company. Tenant security deposits are also held in this account. Reserves (your money) sits in this account as well.Unless you have a very close relationship with the property management company, you should be looking for a PM with a state regulated trust account. The PM company's operating account is not really a concern of yours. This is just their business account used for their own income and expenses like office rent, office supplies, payroll, etc.Remember that ALL money that the property management company touches on your behalf is YOUR money. The PM company's accounting should reflect that. It is only through the management agreement that provides for blanket authorization to handle your money without specific permission on a case by case basis. These are typically charging of management fees and maintenance fees up to a certain dollar amount.If that doesn't get at what you are asking please clarify.

Oren K. · Answer

@Alex P. - I think what has been missing from this thread is the idea of segregation. A licensed PM will set up a separate (segregated) set of accounting books and a separate bank account for each property. It is the only way to accurately track what is going on. On top of that, they will have their own books / accounts for their company. So when you pay the PM company, the funds are physically and notation-ally transferred from on place to the other; a check gets written from your account and deposited to their account. Just as you would not want your funds co-mingled other owners funds, there should never be a co-mingling of your funds with the PM's funds.OrenP.S. If you have several properties, you could run them from one account but that is just asking for problems down the road and I don't think most licensed PM companies would do that.

William Hochstedler · Answer

I think you meant the trust account here. The property owner (client) never has access to the operating account as that is the account that runs the property management company's business--much like you don't have access to any vendor's company operating account.Regarding the trust account, you won't have direct access to this account either because it is where other clients' monies are held as well. However, property management companies are required by law to provide a full accounting on a periodic basis of all of your funds in that account.All this pertains to licensed property management companies. Most states require a license for property management with exceptions. If you are setting this up with a friend/relative or employee the exception may apply and you will structure the relationship quite differently--usually with some sort of shared account.If you don't know this property manager, they should be licensed otherwise they may be operating illegally and you have no recourse other than litigation for financial misdeeds. Check with Indiana(?) state law. And always read your management agreement carefully. There are a bunch of good posts here on what to look for.

Alex P. · Answer

Thanks for the information @William Hochstedler and @Robert Gilstrap. To confirm, then, the PM would set up (or already have set up) the trust account(s) and the rents are made out to the PM company. Does the owner typically have any access to the operating account other than the ability to deposit money into it for reserves?

Jeff B. · Answer

IMO, tenant deposits should be held in a separate account from the operating account.