Quote from @Danny Arnold:
Quote from @Lisa Hammond:
We started our own company after interviewing many PM companies. I asked very pointed questions about their operations and finances after we had a very bad experience with a PM company. The number one question I asked was when they pay the Owner Distribution out and if they required reserves. Most proudly told me they paid out on the 10th or 12th and never required reserves. That was a HUGE red flag and I immediately did a full stop. If they made it past that question, I then asked how many bank accounts they used and were their company funds mixed in with the operating funds. If they were, that was another full stop. I couldn't find a single one to pass even those two questions so we gave up and started our own company.
Good day, I am curious about the statement above. What is a normal reserve amount and why is not having one a red flag? What should be a reasonable pay out date? I assume having company funds and operating funds would make for a mess?
PM companies should always have a minimum of 3 checking accounts:
1. Tenant - these are tenant deposits and never touched -- this money belongs to the tenants
2. Operating - rents and fees collected goes in here and PROPERTY expenses are paid out from here, after mgmt fees are paid out, owner disbursements come out of this account -- this money belongs to the owners and no company expenses should EVER be paid from this account
3. Company - mgmt fees, maint, leasing, etc all get pulled from Operating into here to pay the PM company then company expenses (payroll, office supplies, etc) get paid from here -- this money belongs to the PM company
Say $1,000 in rent is collected into Operating and there wasn't any maint or expenses that month so only a mgmt fee of $100 is collected on the 10th and paid out to PM company leaving $900 for owner disbursement. On the 12th the HVAC goes out and needs a service call of $120 and on the 13th the PM maint guy goes out to repair a sink leak for $100. Where is this $220 dollars going to come from? The PM company already paid out the owner disbursement for the month so there's no funds available in the Operating acct. This is just one unit, what about the other 100 or 800 units the PM company manages? How are all their Operating costs getting paid from the 11th-30th of each month if they pay out and don't require reserves? I'll tell you how, either the money is all mixed together and they're not keeping a wall between their own Company funds or they're using Tenant Deposits to operate or, out of the kindness of their hearts, they personally cover all these expenses each month at the risk of a tenant not paying the following month so they are personally in the hole (do you think that's happening??). This means they are doing some very sketchy financial practices and don't have a good Controller or CFO in place so I wouldn't trust them to walk my dog. And when you ask about this scenario and they don't have an answer or get red and flustered, walk out.
A reasonable amount of reserve, held in the Operating account by the PM company, is one month's rent but even that is a red flag because we all know a single month can easily go over the amount of rent received for a large repair.
We do not hold reserves and I pay out owner distributions at various dates depending on what day it falls on, usually the 24th-26th. By that date, we've received enough prepaid rent or have a leeway with the vendor that we can fund any Operating expenses from the Operating account.
