Last modified on April 26th, 2016
By Bryan Ives
Property management companies by nature handle large amounts of money from rental income and security deposits. Make sure your banking relationship is set up to properly and effectively manage those large sums. Here are three things to consider when reviewing your banking setup.
Trust Then Verify
You should always set up a trust account to handle security deposits from your tenants. These funds are collected from residents at move in and can’t be touched until those residents move out. Funds in a trust account are protected from potential seizure in the event of a bankruptcy or issues with your other personal or business accounts.
Once you’ve set up your trust account, verify with your bank that it is indeed a trust account. If this account is not set up properly, you are putting those funds at risk in the event you or your firm run into financial difficulty.
You Are Responsible
Setting up a trust account is crucial for another reason. As the property manager, you are responsible for the appropriate management and disbursement of those funds, which technically still belong to your tenants.
Your leases should clearly state in which institution those funds are being held. If for some reason the owner has opted to hold the security deposits, you should hold back rental income equal to the amount of those security deposits and place them in your trust account. Remember you – not the owner – are responsible for those funds.
One, Two, or Many?
There is an ongoing debate in the property management industry over the appropriate number of bank accounts you should have.
Most agree you should have an operating account for rent collection and ongoing business expenses like vendor payments and owner distributions. This account should be separate from the security deposit trust account discussed above. Some states actually prohibit those funds from being commingled in a single account.
There is some disagreement over how many trust accounts to have. Some experts believe one or two accounts are best. Others in the property management field feel that having an account for each owner is sufficient. Most states require that all security deposits held on account must be reconciled monthly with the rent roll, so such a practice definitely increases bookkeeping costs. Some managers feel it is worth it for the level of service and transparency it gives them. It also makes it easier to track down errors should they occur.
However, if you decide on only one combined account, a property management accounting platform like AppFolio allows you to print reports showing a single property’s activity, rather than a consolidated report that is required for the bank reconciliation.
Before making your decision, make sure you know your state’s particular rules and regulations and then choose what’s best for your business.
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