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Managing Tenant and Owner Funds

When a property owner hires a property manager, he does not only entrust him his properties, he also handles a range of things associated with managing the property. These things are the collection, security deposits, funds and write checks on behalf of the owner. For this relationship to work, there has to be trust, accountability, and transparency between the property owner and the company. The following is a significant list of issues to discuss with the property management company:

 

Payment to Owner

Consider asking:

  • When do they mail checks to property owners? Ask for the exact date.
  • Will the check be for that month or will the property management company hold back a month? This option is less favorable because, ideally, you want your income generating interest in your bank account.
  • Do they provide a direct deposit?

 

Taxation

Taxation is an important issue that arises with income acquired from rental properties. Be sure to ask:

  • Is there an IRS-1099 and a summary of profit and loss for your taxes provided by them?
  • Are they able to provide valuable recommendations to you about tax deductions?

 

Accounting

Remember that accounting and taxation are two different sets of expertise that you need to ask your property management company about. Be sure to ask:

  • Are detailed documentation and records available? A transparent audit trail for all funds per property is ideal. Another thing you should be looking for a company is if they’re providing all invoices. This is for you to better prepare you for your taxes.

 

Reporting

Reporting is important to see how your property management company is doing. You will always want to check up on them and have them know that you are regularly looking. Regarding reporting, you should be asking:

  • How often they send out reports and when they are sent out? The industry standard is every month and there is no reason to work with a company that doesn’t provide income/expense statements monthly.
  • Is it possible for you to review your reports online? Online access increases transparency and saves you a great deal of time.
  • If possible, request to see a sample report. Reports are one of the best ways to track how your property management company is managing your investment. You need to be sure beforehand if their reports meet your needs. If they do not, consider working with a different company. Reports should be detailed and easy to read at the same time. An ideal report should show collected rent, itemized maintenance, and dedicated property management fees.

 

Security Deposits

Security deposits are important to protect yourself from recouping losses due to tenant damage. But be careful in handling them. One mistake can cost you hundreds of dollars. If you hired the wrong property manager, there is a high possibility you’ll lose your right to the security deposits or worse, end up owing your tenant a substantial amount of the deposit amount. Due to this risk, always ask your prospective property management company that you are considering the following in hiring:

  • How do they handle security deposits? State laws vary and the company must understand local laws in all places where they are serving as a property manager to your properties. In states where it is required that the funds be held in a non-interest-bearing trust account, you may find a management company that has never heard of these requirements. A property manager is required to shield you from legal liability, and if they haven’t researched a basic provision such as this, it is a red flag that you should avoid. If your state allows landlords to hold and use the security funds, try to use the funds for move-out cleaning expenses or advertising to leave a cushion in your costs.
  • How much is collected? The security deposit is all you have if something goes poorly. States vary on this regulation; however, there is usually a limit between one and three months’ rent. Even so, between a half to a full month’s rent is the typical rate. Tenants who have a poor credit history may be required to pay more.
  • Ask if they accept personal checks and what happens if the check bounces. This is not a wise practice and your property management company should only be collecting a money order or cashier’s check.
  • How quickly do they send out refunds? There should be a tenant a report when regarding refund or itemized deductions within the required period in your state.
  • What is their list of conditions and deductions for refunding security deposits? How often have they gone to small claims court over security deposits? The refund and deduction process should be structured to encourage favorable behavior from tenants. Avoid property managers that make excessive reductions. Also, they should be providing clear images and documentation reports to further shield you from liability later on. Be aware that faulty practices with security deposits could lead to small claims court issues with tenants if you are not careful.

 

Miscellaneous

There are several additional payment issues to consider including:

  • Do they make payments for owners such as a mortgage, insurance, property taxes, or HOA dues?
  • Will the manager be permitted to sign checks on the owner’s account? If so, how can the property owner protect themselves from issues related to the misuse of funds or embezzlement?
  • How quickly do they pay vendors? Do they have vendors to perform work without paying until rent is collected? Keeping vendors happy should be a priority for the property manager so that there are no additional fees that could negatively impact profits.
  • Are they doing measures to prevent the co-mingling of funds between the properties they manage? Since there is a great deal of responsibility associated with property management, it is important to discuss these subjects during the interview and make sure you understand their explanation.

 

Another important aspect of property management is how a property management company sets out to set and then collecting rent. To learn more, continue to the next section of our guide.

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