New owner, bookkeeping question!

[Joe Derobertis]

Hi All,

I've recently acquired a few properties and have started using Stessa (since I get it for free with a BP Pro membership) for bookkeeping.   All of my properties are being managed by a property manager and it seems that I will get my owner draw one month AFTER the rent is paid.  So for example, for September I won't see that money until early October.  That in and of itself isn't an issue, I'm more asking how should I record that?  Ideally I want the money collected to be accounted in the month I'm paying the mortgage so I can get a better sense of my monthly cashflow month over month, but that means I will need to record the draw I receive in October in September so things all line up nicely.

Anyone have any thoughts on that? 
  

[Kevin Sobilo]

@Joe Derobertis, I believe you are over thinking things and I can certainly understand that.

I would simply record things when they actually happen FOR YOU. Just because your PM receives rent, does NOT mean you will get that draw the next month. Perhaps something happens and you need to sue the PM to try to get those funds.

Think of the end of the year as well. If you don't receive December's rent until mid January, that is income for the following year because you didn't receive it until January.

As for your monthly cash-flow, I recommend taking a step back! Way way back. With a small number of properties cash-flow is VERY inconsistent, especially depending on how you define it. 

What I recommend is looking at it over a longer period of time like the previous year to evaluate it. What I also recommend is also factoring in soft expenses that you are budgeting for but have not yet spent. For example, you may buy a property today and budget money for capital expenses each month for the next 5 years until finally you need to replace the HVAC. If you don't factor that cap ex budget in your cash-flow evaluation, then for the first 5 years it looks like you are doing GREAT and in year 5 you are doing TERRIBLE, but in reality its was business as usual all along. 

[Bill B.]

You should be paid by the 10th of the month the rent is collected, not the next month. There is no way I’d wait 30+days to collect my money. 

In regards to your question. You might be able to use cash based accounting and simply record September rent in October (talk to your cpa) or my work around would be to create and account called “owed form PM”. Record the income with the correct date in that account. And then when they pay you do a transfer from that account to your checking account. 

But PLEASE look in to other PM options. You want a much better idea of how your business is going. You don’t want to find out in October that your tenant didn’t pay September and now hasn’t paid October. There is no reason you shouldn’t be paid by the 10th. 

[Theresa Harris]

I agree with the others though you may not get paid by the 10th, you should be paid in the same month as rent is collected.  I get mine around the second week of the month, sometimes a bit later.  The PM should have it set up so it is all automated and other than checking rent is paid as are bills, there isn't too much to it and one person usually handles their accounting.

[Matthew Irish-Jones]

Quote from @Joe Derobertis:

Hi All,

I've recently acquired a few properties and have started using Stessa (since I get it for free with a BP Pro membership) for bookkeeping.   All of my properties are being managed by a property manager and it seems that I will get my owner draw one month AFTER the rent is paid.  So for example, for September I won't see that money until early October.  That in and of itself isn't an issue, I'm more asking how should I record that?  Ideally I want the money collected to be accounted in the month I'm paying the mortgage so I can get a better sense of my monthly cashflow month over month, but that means I will need to record the draw I receive in October in September so things all line up nicely.

Anyone have any thoughts on that? 
  

 Why do you need to record anything?  Your should be getting a monthly P+L statement from your property management company and a year end statement at the end of the year.

Give your accountant your bank statement where the money is deposited and the P+L from your property manager and you are all set. 

[Denis Ponder]

Well, if you are truly working on a cash flow statement, you can't really record the cash flow in a time period prior to when it was received.  That defeats the purpose of a cash flow statement.  You want to record the cash when it comes in and goes out, so you can track the flow of cash.

I agree though, a month in arrears is wild.  I have 3 different PM's for properties in different areas, but they all pay me in the same month the rent was due.  Sounds like your PM is either trying to generate additional interest revenue for themselves with your money, or they are having their own cash flow problems.

[Brian Kloft]

First unlike others here I don't think getting your owner draw in the following month is odd at all. That is the way my property management companies did and do it. My background is commercial real estate and that is a normal way of doing it there. It took explaining it to some residential clients at first but there are lots of benefits to it. 

As far as the book keeping on your end, just keep it simple. Since you are splitting up your property books, (your property manager doing part and you doing part) it will be a little messy and require adjustments at the end of the year. When you get your owner draw input it in the books at that time and don't worry about back dating it. Make sure to ask your accountant how they want you to input it. It shouldn't be input as income as it is not income, your property managers already input it as income so that would be counting it twice. It is an owner draw so that means it goes on the balance sheet and not the income sheet. Your accountant will need to merge the two reports together at the end of the year for taxes, thus you should check how they want it input, so that it takes them less time and thus costs you less money. There is a chance they will say just to send them the P&L from your property manager and the expenses that you also paid and completely ignore the rest of your books so it doesn't matter. 

Recording it in September or October will not make any difference on your trying to get a feel for your monthly cash flow, as long as you are consistent in the way you do it. If your owner draw coming in every month is $1000 and your mortgage going out is $700 and that goes on for 6 months, it doesn't matter if you show it in the prior month or this month; it will still show $1000 in and $700 out, thus you will be able to see and understand your cashflow. Hopefully this makes sense. BTW one of the benefits of the paid in arrears is the consistency. You should be getting your owner draw at the same time every month regardless of if your tenant paid 5 or 10 days late or not.  

[Drew Sygit]

Are you doing accrual or cash accounting?

If accrual, you can record it in the month earned.

If cash, you must record in the month received.

[Joe Derobertis]

Thanks all for the responses.  Mostly I'm just trying to keep track of things for my own purposes to make sure I'm getting what I expect and the properties are performing the way I expect.  This is less about tax purposes and more about simply tracking and evaluating the performance.  I think I was/am overthinking it and will just keep it simple and then at the end of 6 months-1 year I can look at the overall performance.

Much appreciated!

[Max Emory]

Hey @Joe Derobertis, congrats on your new acquisitions!

The way our bookkeeping firm does this is via a manual journal entry dated the last day of the month the transactions actually occurred for your properties via your PM. Then, we match that journal entry to the bank deposit transaction so everything is reconciled.

So, you'll record each line item your PM gives you via their monthly owner statement using a journal entry within Stessa for September 2024 dated 09/30/2024. Then, you'll match that journal entry to the bank feed deposit within Stessa that will most likely flow through your bank account in early October.

This method allows you to clearly see your income less all applicable expenses per month per property within your master accounting software.

Doing this also has the added benefit of allowing you to catch any mistakes made by the PM as well (we catch mistakes all the time for our Clients that would have otherwise cost them money).

Does that make sense?

PS - There's a great FB group for questions like this called, "Bookkeepers for Real Estate Investors".

Hope that helps!

[Basit Siddiqi]

It is very strange for a PM company to hold rent for that long.

The industry standard is for the PM company to pay you on the 10th after rents are received.
I do see some PM companies paying on the 15th.

Ideally, the PM company can pay by the 10th because most mortgage payments are due by the 15th of the month.

You may want to consider giving another look for a PM Company.

[Basit Siddiqi]

To answer your question, 

Accounting when you have a PM Company in place is tricky because your bank statement may only show a payment of $800 but in reality that may be the result of $1,000 of gross rents less $100 in PM Fees and $100 in repairs made on your behalf.

Best of luck.

[Ana R.]

Sounds like you would benefit from the accrual method not just for taxes but also to keep accurate track of money in vs out. To explain it as simple as I can when recording accrual method record your income when it is earned and expenses when incurred. This can work even if you receive the net income the following month (which is normal for some PMs) What I do for my clients is record the rental income the day is earned let say October 1 and then record any expenses when they are billed even if they have not be paid yet example Hvac maintenance billed Oct 2. Once the net amount clear in November bank statement make any journal adjustment necessary so your debit and credit are balanced. 

I hope that helps :)