Being a property manager means that you handle quite a number of your clients’ money. Monthly rent, down payments, bill finances, and security deposits are all yours to maintain and keep track of. While opening separate bank accounts for each property may seem like an easy idea, balancing just one banking account can be a hassle. So why attempt to keep 20 or 200 of them balanced singularly? That’s where trust accounting comes in.
Trust Account Defined
Trust accounting in property management refers to the process of managing and recording financial transactions related to rental properties on behalf of property owners or landlords. It involves the proper handling and documentation of funds received from tenants, such as rent payments, security deposits, and other fees.
The purpose of trust accounting is to ensure transparency, accuracy, and accountability in the management of these funds. Property managers are entrusted with handling the financial affairs of property owners, and trust accounting helps maintain the integrity of these transactions.
It may sound a bit intimidating but a trust account is really quite simple to understand. Having a trust account basically means that you have separate accounts for each property in one single banking account.
Think of a trust account like a room full of safety deposit boxes. While your banking account holds all of the accounts, or ‘safety deposit boxes’, it allows you to go through and maintain them all individually. This helps to keep each property account managed without the worry of having funds commingling with that of other property owners or even with your own operating capital and expenses.
Why Use a Trust Account
Aside from keeping your accounts from commingling, using a trust account allows you to keep diligent track of each property in the instance your company is audited. This also gives you far better and accurate account transactions if you need to pinpoint a specific piece of information. Let’s look into the key purposes of trust accounting in property management.
Purpose #1: Safeguarding Client Funds
Property managers often handle rental income, security deposits, maintenance funds, and other financial assets that belong to property owners or tenants. Trust accounting ensures that these funds are kept separate from the property manager’s personal or business accounts, reducing the risk of misappropriation.
Purpose #2: Legal and Regulatory Compliance
Many jurisdictions have specific regulations and laws in place to protect clients’ funds in property management. An example of this is how quickly funds must be deposited as dictated by the Real Estate Commission. Trust accounting helps property managers comply with these legal requirements by maintaining accurate records, tracking transactions, and providing regular financial reports to clients. Software like RentPost, can also help property managers meet these deposit requirements with online rental payments, like RentPost’s Payshift payments.
Purpose #3: Transparency and Accountability
Trust accounting provides a clear and transparent financial trail, allowing property owners to verify the handling of their funds. It helps build trust between property managers and clients by demonstrating a commitment to financial integrity and accountability.
Purpose #4: Accurate Record Keeping
Property managers deal with numerous financial transactions, including rent collection, bill payments, and maintenance expenses. Trust accounting ensures accurate and detailed records of these transactions, making it easier to track income and expenses, generate reports, and reconcile accounts.
Purpose #5: Auditing and Dispute Resolution
Trust accounting systems facilitate audits and help resolve any financial disputes that may arise between property managers, property owners, or tenants. With well-maintained financial records, it becomes easier to identify discrepancies, reconcile accounts, and resolve any discrepancies or misunderstandings.
Overall, trust accounting plays a crucial role in maintaining the financial health and reputation of property management companies by ensuring responsible management of client funds, compliance with regulations, and fostering transparency and trust with property owners and tenants.
Generating Owner’s Statements from Trust Accounts
Owner’s statements are a rather big part of the accounting side of property management. Each property owner should receive a statement every month giving them a detailed account of their property’s financial standings. These statements include rent and/or utilities paid in by the tenants, service or maintenance payouts, management service fees, and how much actual money is left in their accounts for the property.
Generating an owner’s statement from a trust account in property management involves summarizing the financial transactions and providing an overview of income and expenses related to the property owner’s investments. However, keeping track of all of these transactions can take up a decent amount of time and requires far more organization than just receipts and statements in a shoe box.
It’s worth noting that property management software often includes features for generating owner’s statements when linked to trust accounts. This can streamline the process and automate calculations based on the data entered into the system. Such software can help ensure accuracy, efficiency, and professional presentation of the owner’s statement.
Trust Accounts and Rent Rolls
A rent roll is a document that provides a comprehensive summary of rental income generated by a property. It typically includes details about each individual unit or tenant within a property, as well as the lease terms, rental rates, and other pertinent information.
The rent roll serves as a crucial tool for property owners, real estate investors, and property managers when it comes to income analysis, property valuation, and portfolio management. By analyzing the rent roll, they can determine the total rental income, vacancy rates, lease expirations, and potential rental growth opportunities. Potential buyers and lenders often rely on rent rolls to assess the income-generating potential of properties. In addition, investors and banks normally request a rent roll as part of their due diligence process.
Because of its versatility and usefulness, it’s recommended that landlords and property managers keep an accurate, up-to-date rent roll for each of their properties and for their portfolio as a whole. For this reason, it is essential to maintain trust accounts for each property to be able to provide accurate rent rolls at any given time. While a rent roll and a trust account are two distinct components of property management serving different purposes, it is clear how one works for the benefit of the other to simplify the entire rent or property management process.
Summary
A trust account, also known as an escrow account or client account, is a separate bank account used to hold and manage funds that belong to clients or property owners. In property management, trust accounts are typically utilized to handle rental income, security deposits, maintenance funds, and other financial transactions related to the managed properties.
The primary purpose of a trust account is to safeguard client funds and ensure they are kept separate from the landlord’s or property manager’s personal or business accounts. Trust accounts enable transparency, accurate record-keeping, and compliance with legal and regulatory requirements governing the handling of client funds.