Ep015: What Your Accountant Wishes Your Property Manager Knew 

Chris McAllister: Hello everyone and welcome back to the Landlord Profitability Playbook Podcast. I’m Chris McAllister and it’s my job to create and coach business opportunities and strategies that support and add value to the lives of residential real estate investors. I’m here today with my podcast partner Laci LeBlanc as well as Gretchen Mitchell and a very special guest today, our accounting partner Jill McGregor.

Good morning ladies. 

Laci LeBlanc: Good morning. Good morning. 

Chris McAllister: So today we’re diving into part eight of our 12 part series called What to Expect from Your Property Manager. And today we’re focusing on the critical topic of accounting. And what your accountant wishes your property manager knew. So that’s what, uh, that’s what’s happening today.

So Jill, we’ve, uh, we’ve never met you. How long have, uh, tell us about yourself and how long we’ve been working together and all that good stuff. 

Jill McGregor: So, um, my name is Jill McGregor. I’m the. Owner of JSM client services located outside of Chicago, Illinois. Um, I’ve actually been working with Roost real estate for over 10 years in their real estate capacity.

And then recently the last three years, excuse me, the last three years in their property management. And it is my job to, um, make sure that their books are properly reconciled, that their owners. Um, accounts are reconciled and we’ll get into all those details later, but I have the unique perspective of being both in the accounting world as a tax accountant and knowing what I wish my clients who are in the property management world would provide to me as a tax accountant, but also, um, as a part of the Roost property management team, I’m also helping them as property management owners.

Chris McAllister: Yes, and it’s also your job to make sure I can sleep nights. 

Jill McGregor: I, it is, it is, and we do, which is fantastic. And 

Chris McAllister: I appreciate that. Believe me, there’s nothing. Accounting can be a very, very scary place. It can get away from you really quickly. And, you know, what we really want to talk about today is, you know, accessing and understanding property financials and portfolio financials if you have multiple properties.

You know, it can be an annoyance sometimes at best and a major source of anxiety in a worst case scenario. And God knows we’ve gone through periods where I just didn’t have faith in our process and the software we’re using or the people and, you know, in our situation, you know, all that money that comes through, it’s not ours, right.

It’s somebody else’s. So, you know, we have a fiduciary responsibility to make sure that that money is accounted for every moment of every day. Okay. So accounting, uh, you know, both for, for our property management team and for our owners, it can be a major source of anxiety. And the key to from a property owner perspective is that you, you get clear, regular, hopefully monthly, at least easy to understand owner statements that detail your income and expenses and, and give you the information you need to Monitor, uh, your performance and the cherry on top is, is that the end of the year, those reports are so good that you can deliver them to your, uh, accountant and they can take care of your taxes for you.

That’s, that’s really what we should all be looking for and what we should all be expecting from our property managers. So I wanted to kind of go through a couple of questions as we kick off today of questions that. You as a listener and, and a, uh, investor may want to ask your current or your perspective property manager.

And, you know, one of those questions is, is, you know, very simple. How frequently are financial reports provided? So, you know, a lot of what we’re going to talk about today is, you know, kind of how we do it because we can’t help, but sort of speak to what we’re into every single day. But I guess, Jill, I’ll, I’ll ask you, you know, as a, as an accountant.

With various, uh, real estate and investors as clients, how frequently should a proper, should a property owner expect to get a report from their manager? 

Jill McGregor: One of the things that makes accounting scary in this realm is that there’s not a lot of consistent or there’s not a lot of solid guidelines, but I think the guideline that we’ve always used is because we pay our owners out monthly, we provide monthly financial statements because those financial statements are a reflection of what we are paying back to our owners.

If you’re receiving rent monthly and there’s monthly expenses, you should have monthly financial statements. 

Chris McAllister: Yeah, and we actually, not to get too far ahead of ourselves, but we provide, uh, financial statements literally throughout the month, correct? Because we do our first check run on the 10th. 

Gretchen Mitchell: We do.

Anytime we have a check run or anytime, um, You know, bills get paid in and paid out. So we do it on the 10th and 20th, and then we do a full month later. So actually they get three reports a month with us. 

Jill McGregor: So what they’re really getting is owner statements every time they’re getting paid out, Chris, but the true financial statements would be provided monthly.

Right, exactly. 

Jill McGregor: So, so there’s a lot of different types of reports they need to be asking their property management. about like what additional reports other than just financial statements, but financial statements should be provided monthly. 

Chris McAllister: Yeah, I mean some of the stuff that I want to see as an owner is who paid the rent, right?

And those are 

Jill McGregor: financial statements, but they’re important reports to have. 

Chris McAllister: That is an excellent distinction. That makes perfect sense because there’s things that you’re going to want to see just to see how your properties are performing over the course of a given month, see where any trouble lies, see who hasn’t paid, who has paid, and then as you roll up that entire month, You know, historically, then, you know, by the first or second of the month, you want to get a full accounting of everything that happened.

And then the other question, the next question is based on, based on that, is to ask your prospective property managers, can you show me examples? You know, I, for a lot of folks in the real estate business, and there’s not necessarily anything wrong with this, but some real estate professionals, you know, they specialize in sales, but they do property management on the side for certain special clients.

And that really, that tends to work well, you know, when it’s, when it’s kept to a small scale, but those folks that. Are sort of operating a boutique property management services. Oftentimes they don’t have, um, I don’t know what you want to say, uh, perfectly formatted financials. You know, there’s still a lot of folks in this business who, who work from Excel spreadsheets.

So it’s, it’s a legitimate question, regardless of what the answer is. Can you show me examples? And what I’m, what, what you want to be looking for is either you want to see something from a building or an app folio. Or you literally want to see, you know, what their spreadsheets looked like. So you know what to expect.

And this is another one that’s a sort of second level because it’s not something that we talk about, um, you know, uh, a lot with our owners and, and maybe we, we should be, but another great question is, do you have the ability to differentiate capital expenditures from regular monthly expenses? And I’m not even sure how we pull that off at this point.

So what are your thoughts? I can 

Jill McGregor: tell you how we do that. So let’s, let’s just quickly. Explain the difference. A capital expenditure is something large. It’s typically in this industry. It’s a leasehold improvement. It’s a new roof. It’s a new HVAC system. It’s brand new windows. It’s new siding. It’s big purchases that your tax accountant is going to have to make you take over time.

You cannot take the entire expense in one period, meaning one year. Where a water bill, uh, doing the locks, cleaning carpets, Move out trash. Those things are, those are expenses and we just take the whole expense whenever it actually happens. So that’s kind of the differentiation. And I’m not even going to get into the specifics of what makes a capital expenditure by dollars because that’s very specific to the expenditure.

That’s a tax level. Um, that’s something you have a conversation with your tax accountant about because they will make the best decisions for you tax wise. But, um, what we do. For roost property management is when there are those large invoices any invoice that says new new roof new HVAC, anything that is new, we have our, an individual line item where those invoices go.

And then at tax time, we review those invoices and decide if it is truly a capital expenditure or a one or an expense. So there does have to be some conversation at the tax level with a tax accountant. Um, but the way we do it is In app folio is we just have a specific line item where those large expenditures go, so it’s very easy to see what our large expenditures were versus our month to month daily or month to month business expenses.

Chris McAllister: So on our team, who, who’s responsible for making sure those get coded that way? 

Jill McGregor: Who’s ever putting in the invoice. And usually it’s also with a question to me of, Hey, we have this invoice. Is this something we should put here? It’s also when we review the financials at the end of the year. Let’s say the building maintenance and repair account is extremely high.

I as the accountant bookkeeper will ask to review the invoices and I will review them and make the decision if something should be moved. 

Chris McAllister: So we can do the best job we can or your property manager can do the best job they can getting things allocated but that doesn’t relieve you the owner. and and potentially your accounting partner to to sift through that detail and decide how you want to handle your your individual tax situation.

I want to, I think that’s something we want to kind of dig into a little bit more next year because when I’m thinking about what my Um, owner statement looks like. I’m not sure how clear it is. And maybe it’s just because I’ve not looked for it before. So that might be something that we can sort of make more prominent as we go into next year.

But that’s a great question. Because the You know, especially if you have more than one property and you’re, and you’re running this as a, uh, literally as a business, as many of our owners do anything that your property manager can do to help make, uh, your accountant, your Jill’s job easier. They’re absolutely going to appreciate what else, what else should an owner be?

Asking their property manager based on what their accountant might be looking for. 

Jill McGregor: I mean, honestly, the biggest things are the financial statements, um, and then the capital expenditures because that makes, that is what ultimately has to go into those final tax reports to come up with the final, um, taxable income for the year.

Um, I think the other important things are

a tax account is going to be asking for did you 1099 all of your contractors your tax accountant wants to know that you are properly documenting those expenses for your contractors. Um, and I think we’re going to get, you know, that might be a whole nother podcast talking about 1099s, um, for contractors versus owners as property management.

Um, but that’s something they’ll be asking for. And To be honest, your accountant may ask to see some of those bills and some of those invoices related to the individual properties, um, just to be sure that they are being allocated correctly. And, um, you know, we do that. We, we spot check things for our, not because we don’t trust our clients as accountants, but because we want to spot check and make sure that things are being done correctly.

Chris McAllister: And we’re going to talk more about our whole 1099 process as we start talking as we get to the section about what we do too. But those are, those are all things that just aren’t always top of mind during the course of, uh, of the year. So I also, I think the other thing that we have to bear in mind is, you know, what is the owner portal look like?

How accessible is it? You know, how do you get to it? Is it secure? So providing access to a secure owner portal where you can access and share your reports, your property information, tenant information electronically with your accountant or partners is critical too. And almost every piece of software outside of an Excel spreadsheet does that these days, as far as I’m aware of.

And accountants also value the ability to access historical data and tenant ledgers for comparative and trend analysis. And I know with that folio that we use, um, All of that historical information for every report that’s generated is in the owner’s, um, is in the owner’s portal. And in the show notes, we’re going to provide a link to a short video that Gretchen and I did, um, sort of walking, uh, our current owners and prospective owners through, um, What our portal looks like.

And we used my portfolio as an example. And I, that was actually very helpful for me to learn more about how to use the port portal. So we’ll make sure that’s in the show notes too. So interview questions for your property manager, you know, what features does your owner portal offer? How do you ensure the security of the data within the portal?

And can you walk me through it? You know, I’m embarrassed to say I was, I’ve been fortunate for the past few years that we’ve had Jill, we’ve had Gretchen, Josie, Angela, Kelly, and And we’ve not had to worry a whole lot about accounting and I didn’t have to dig too deep into that, but I decided it was time that I.

Uh, kind of figured it out and used my own portfolio as the, as the example in the guinea pig. And, you know, I’ve, I’ve learned a lot and Gretchen, I think in the process, you know, we actually moved some things around and, and made some decisions that I think were good for, you know, my doors as well as, uh, our owner’s doors.

So it’s something that you, you, you want your property manager to be, familiar with. It’s not something they’re necessarily going to be digging into themselves every day, but it’s definitely something that they need to know how it works and they need to know what to look for. So let’s talk about the property management trust account.

So, you know, anytime that every property manager who is managing on behalf of somebody else, first of all, they have to be licensed. And that’s true in every state. in the United States. And secondly, they have to maintain a property management trust account. So a property management trust account is a specialized bank account where property managers hold funds on behalf of the property owners they represent.

And this segregation is crucial for ethical management and legal compliance in ensuring that client money is not used for company business expenses. Now, that may sound like, well, of course, that’s not possible. Well, I can tell you, not only do things that are unethical borderline criminal happen, but mistakes also happen too.

So Jill, maybe you can walk us through the full process with the trust account and the importance of the trust account and what an owner should be looking for from a property manager. 

Jill McGregor: The importance of the trust account is just what you said. It is to completely segregate the. The funds that are allocated to each individual door, as we say, they are allocated separate from any funds that we would use to operate, in this case, Roos Real Estate.

Um, so our trust account has a dollar amount at the end of each month, and we run reports, and we know to the penny in that trust account how much money belongs to each quote unquote door. And. At the end, that number equals the exact amount in the bank account. It does not take into account that Roost is paying rent.

They’re paying that out of a different account. That’s an operating expense that the owners, the property management owners, are not responsible for. So, therefore, rent overhead utilities to run the Roost office. They’re all being paid out of a separate account with separate funds that never co mingle with our owner’s funds.

And that is really the best way I can explain a property management trust account. It is to make sure that the daily operating expenses of Roost Real Estate never touch our owner’s funds for their individual properties. 

Chris McAllister: Yeah, that’s the that’s the easiest way to lose your real estate license. If there’s any, any evidence or any width of commingling.

And that’s the thing that, you know, kept me up at night for a long time. And I will tell you also it’s it’s that is probably the one thing that that causes real estate brokers not to get into the property management business at all. It’s maintaining that trust account on behalf of the, of the third party client.

So like Jill said, the trust account keeps rent payments separate from the property management company’s operational funds. And again, this is not just, this is not only for ethical. management, but it’s also for complying with real estate licensing law. So when choosing a new property management company or assessing your current one, a crucial aspect to inquire about is their process for trust account reconciliation.

Now this process is also regulated by state law. And it’s essential for ensuring financial integrity and accuracy of your books. So, key questions to ask. How often do you perform trust account reconciliations? It’s important to know that your property management company conducts these reconciliations regularly, typically monthly, to prevent any discrepancies or mismanagement of funds.

So, Jill, Gretchen, what are your thoughts on that? 

Jill McGregor: Well, we do it monthly because bank accounts get reconciled monthly. It is the easiest. It is not easy to do, but it is easiest to do it consistently with the bank reconciliation process. Um, it also really gives us a good feel for if a property is Becoming low on funds.

If Gretchen or Josie need to reach out to an owner, because we anticipate bills needing to be paid and there aren’t funds in that account, um, we also, it is kind of a, a communication tool with the owners, because again, it gives us a good reflection of what, um, that owner has in their quote unquote, door account.

Gretchen, do you have anything to add to that? 

Gretchen Mitchell: That’s exactly, exactly. Yeah. 

Jill McGregor: And we know which owners keep zero in those accounts. And that’s where it helps us communicate with the owners. Um, we have owners that always want to have a minimum balance in there. And so we leave a minimum balance in that individual door account.

And we do it by the door, by the unit. It isn’t even done just at the property owner level. It’s done at the individual unit level. So an owner may have a lot of funds in one door, but be running low in the other. It’s the opportunity for us to call the owner and say, do you want to contribute more money?

Or are you going to allow, give us permission to transfer from one door to another? Um, so it’s also, like I said, it’s not only part of the, um, ethical management of the funds. It’s also a really good communication tool with our owners. 

Gretchen Mitchell: Yeah, and we reach out to those owners, you know, that are running low on funds each month too.

We have, you know, Angela keeps track of who owes what and we know what bills are coming so we just get ahead of that too. Yeah, 

Jill McGregor: it’s much nicer to be able to call an owner at the end of the month and say you have a 1, 200 bill that’s coming up and you have 1, 100 in that account, what can we do for this 100?

Versus, and doing that every month and getting in a habit with them, versus calling them once or twice a year and say, oh, by the way, you’re six grand in the hole in your, in your door account. They don’t, that, A, that’s not legal and ethical, but it’s also not good with our owners. Yeah, they’re not going to like that.

No, they don’t like that. 

Chris McAllister: I can tell you that there’s a lot of property managers out there who Don’t get their reconciliations done, even within the next month or into the second month. And, you know, I, one thing I applaud that you guys have, you know, I guess made a priority this year is, and Jill, I know you like the word cadence, but what is your property manager accountants cadence and for us, correct me if I’m wrong, but we are pushing really hard to get our reconciliations finished before the first check run of the month.

Jill McGregor: Yes. 

Chris McAllister: And what’s interesting about that is if you can catch any mistakes in the first nine days of the month and get them corrected, then they don’t carry over into the next month and potentially beyond, which causes grief for the owners. When they see things on their owner statement, they don’t understand.

It causes grief for our team because we’ve got to go back and clean that up. And things just seem to compound. And get worse so fast. So a good, a good question. A good expectation is you want them to say yes, that they do the reconciliations every single month, but then you want to ask them, you know, how fast do you get them done?

If the month ended, you know, if November ended on the 30th, you know, when will I see, um, my November, uh, Final statement, uh, or not even that it’s when, when will you have the reconciliation done? And the argument may be, well, that’s kind of none of your business as long as you get your money. But I’m saying I think it is your business as an owner because you want to know that they have Processes in place and controls in place to make sure that any mistakes and mistakes happen, but they get caught and rectified as fast as possible as soon as they surface.

And that’s something that, uh, uh, Jill and Gretchen with us have been focusing really hard on speeding up that cadence. So I don’t think 

Jill McGregor: I don’t think a property management owner can ever expect to see reconciliation reports because it would be. A confidentiality issue because every property manages on there.

But I think it is really important for property management owners to have that discussion. With their bookkeeper or their accountant or whoever is doing the reconciling process Like it’s really important to understand again the cadence of the accounting um And we are really fortunate at roost that are the banks we choose to use and this is an important factor too The banks we choose to use have bank statements available for us on the first or second of the month.

There are banks that do not have bank statements available until the eighth or ninth of the month, possibly. And you can’t be as rigid in a reconciliation process as we are if you don’t have those bank statements available. And that’s why the accounting cadence is important, because you have to get in that rhythm.

And like I said, Roost is very fortunate in the fact that our banks are so good. That at that, that we can then bump up our cadence and be done reconciling by the 10th of the month. 

Chris McAllister: Exactly. The next thing I want you to question or inquire if your prospective property manager about is ask them, tell me about your triple tie out process.

Now, I, I know this sounds like we’re deep in the weeds and we are, and only a few people are really going to, you know, necessarily get excited about this, but the, the reason why I want you to be aware of it, if not excited is first of all, as we talked about, there can be zero commingling funds between the, the, your property manager account or their brokerage account, their operating account and your funds.

But just as importantly, there can be no commingling. Between your funds and another owner’s funds. In the same account. So, you know, if we’ve got, you know, 150 owners and, and Columbus, whatever that number is, and all of that money is going into one trust account, you can’t be in a situation where, you know, uh, ABC LLC just had a, a massive furnace problem and they had to replace the furnace and it’s 6, 000 and the bill comes due.

You’re, there are property managers out there that will pay that bill from the trust account on behalf of the owner, but the issue is they’re using somebody else, some other owner’s money to do that. And even if it’s for 15 minutes, it’s, it’s wrong. It’s a violation. It’s, it’s illegal. And that’s, that’s why, like we just said, it’s important that the reconciliations get done early so it’s easier to see which owners might be, you know, having an issue.

Now, I’m not saying we do this for every owner, but if we’ve got an owner that’s been with us for years or somebody with, you know, multiple properties, oftentimes they have cash reserves in another property and we can pay that bill immediately from there. from their reserves. If they don’t have reserves then there have been times and there are times where we will take money from the brokerage and we will go ahead and pay that bill from the brokerage and then we will pay back the brokerage the next month on the check run after either rent is collected or after the owner has a chance to make a contribution.

The key is, you know, you want a property manager who has that quote, strength and flexibility to take care of issues like that, that don’t come up very often, but, but they do come up and, and they’re not going to be using your funds to help out another owner, whether it’s short term, long term, whatever. Um, so, and that’s how we get into this whole idea of a triple tie out.

So take it away, Jill. 

Jill McGregor: So our triple tie up process is mostly done through at Folio, the software we choose to use for property management. And as part of the triple tie up process, there is a trust account report. It literally lists, as I said, every individual unit and exactly what funds are in that unit.

Um, that total. Let’s just say it’s 100 properties and they each have 100. So then that 10, 000 is what should be in the bank account and be perfectly allocated to each property. Um, from there, we’re also working with Gretchen and Josie and Kelly to make sure that bills and rents are being put on the correct property.

That’s another really important part that is that in the tie out process, if the data going in isn’t correct, the data coming out isn’t correct. I mean, I think that’s the, that’s the old adage of good info in is good info out and vice versa. So you do actually have to rely on your property management.

team like Josie and Gretchen and Kelly, Angela, to be putting the information correctly in on the property. And that’s where when during the triple tie out process, if we find something that’s suspicious, we go dig in. And sometimes it’s, Oh, that rent check got, you know, and we catch it right in that reconciliation process.

And then it’s the owner never even sees it because it’s been caught so quickly because of our accounting cadence, it’s caught before the owner’s checks go out. Whereas if it had been caught on the 20th or the 25th of the month, we’d have to then pull money back from another owner and give it to another owner.

It’s, that’s where it gets scary. Um, and where it gets, you know, You know, um, it, it, it just, it gets scary in the fact that now funds are not properly allocated, but at folio again, does a great job of providing those reports so we can go and look at the individual information. Um, so our triple tie up process is to use our property trust fund account to match it up against the bank balance.

And then to review any suspicious or out of line accounts to be sure that those, uh, are allocated properly. 

Laci LeBlanc: Well, I’m officially scared enough. Um, my eyes glazed over almost immediately in this conversation, uh, because I like words and pictures and not so much numbers. But I think that. You guys are really, for me, in the weeds, and I’m not, you know, I own a business, um, and I do all of this.

And I have people who do all this for me. Um, but I just think that this last part of the conversation was very telling because there are so many real consequences to not doing your accounting well. So having you guys here to talk through all of this is, I hope, very helpful. But for people who are doing this themselves, I hope it’s insightful as to what they may be doing wrong that doesn’t always get caught.

Right. Like when you’re filing things, uh, it just doesn’t always get caught. I would say probably most of the time it doesn’t, even if you do something wrong, but in the event that it does, there are these very real consequences, um, is what’s going through my head as I’m trying to put these pieces together.

So having a professional who, who does have all of this knowledge and put all this together, especially you keep talking about the cadence and how important that is. And I had not even considered that. Um, You know, to avoid some of these, these things that I bet people who are listening, who even who own properties and are managing them themselves probably don’t even realize or haven’t realized up until this point, I think a lot of people are probably shaking in their boots.

Chris McAllister: Well, if you’re managing for yourself and it’s only your money, you know, so that’s, that’s, that’s, that’s okay. But my God, if, if you’re like most of the folks out there that are, you know, that are using a property management company, you, you’ve got to ask these questions. So another question is, and, and, uh, you know, we’ll have these in the, in the chat.

In the show notes and blog posts and so forth after we get this posted. But, you know, what measures are in place to ensure compliance with state regulations regarding trust accounts? So again, understanding compliance measures, regulatory adherence. Are they even aware? Are they, are they up to date and so forth?

And then the other thing I wanted to touch on is there’s a, there’s a distinction between interest bearing and non interest bearing trust accounts. And yeah. When I said I need a non interest bearing trust account, the bank kind of looked at me funny, but you know, I think that they, they presume at a certain balance that there’s going to be interest paid.

So another question for you to ask is, are you using an interest bearing or non interest bearing trust account? Now we specify that we only want a non interest bearing trust account. No, no, Mr. Bank, we do not want you to give us any money on these. funds because if it’s an interest bearing account, we literally have to divide up those few pennies or dollars, 

Jill McGregor: all your properties and allocate 

Chris McAllister: them to every single door and roll it up to every single owner.

So, you know, if, if you made a hundred bucks, You know, you’ve got to figure out how much of that hundred bucks each, each owner gets. So 

Jill McGregor: non interest bearing is the easiest route. Yeah. 

Chris McAllister: That is the prime motivation for having a non interest bearing account. So it’s, it’s worth it to you to ask the, ask the question.

Um, And I think we talked, you guys discussed beautifully what happens if discrepancies are found, you know, you got to notify the owners, you got to correct the errors, and you got to, you know, put whatever processes in place or fix whatever processes in place that fix future issues. So, again, the question to ask is what happens if discrepancies are found during reconciliation.

So I think we’ve done a great job of talking about separation and security and triple tie out and co mingling and all that stuff but there’s one more place where trust accounts come into play and that’s what we refer to as the tenant escrow account. So every state is different and we can only speak today to Ohio and Florida but security deposits collected from tenants are held by In a trust account until they are either returned to the tenants at the end of the, their lease, assuming no damages are used to cover repair costs.

Um, so they’re either returned to the tenants or they’re retained by the owner to cover any damages that the tenant left now in Ohio. There is no legal requirement that tenant deposits are kept in a separate tenant escrow account. So when I say separate tenant escrow account, you know, as we’ve talked about, there’s an operating account that, uh, that your property manager uses to pay their own personal bills, you know, keep the copier going, pay their water bill, the rent and so forth.

And then there’s the owner trust account where all the owner funds And then the third account that you want to be asking about is, okay, tell me about your tenant escrow account. And that’s where all the deposits that tenants pay go. Now in Ohio, it’s not a legal requirement. So we do not maintain a tenant escrow account.

We go ahead and we pay out those deposits. Those deposits to the owner when they’re collected. Now I’ll leave this to Gretchen to talk about why that’s good and why that’s bad, but you know, in a nutshell, the owner’s happy. They got a little extra cash up front. The. The issue comes potentially if there’s not solid communication as to, you know, how that money got paid and where is if at the end of the lease, you know, that tenant does what we always want every tenant to do.

They leave that property and as good or better condition than it was when they moved in, then that owner. Right. Has to pay that tenant their, their deposit back. So what’s, what’s the pros and cons about that ladies? 

Gretchen Mitchell: Well, you know, pros, it’s not another account to look at, right? 

Jill McGregor: Correct. Absolutely. 

So it’s good for us is what you’re saying.

Jill McGregor: It simplifies the process. Absolutely. It simplifies the process. 

Gretchen Mitchell: It does. And you know, we do give a security deposits directly to the owner when they move in and we collect the first month’s rent so they get the security deposit and the the rent. But there is a struggle at the end if they do deserve it back.

Getting the money from the owner now again sometimes owners are okay with us taking rent from another property they own and paying that security deposit back but If it’s only one, you know, if they only have one property and this tenant does get the security deposit back, sometimes it is a little bit tough to get that owner to upload funds through their portal to get that money to them.

Um, that’s, that’s really the only, the only con to it, but it hardly happens with us. Um, How 

Chris McAllister: many, how many days, how much time do we have to give a, an accounting and a check back to a tenant? 

Gretchen Mitchell: It’s within 30 days of them returning the keys. We finding it vacant within 30 days, but we beat that every time.

But so we, so that’s the thing is we have no problem getting in there and finding the charges and, you know, getting that final water bill, any rent they miss late fees, we can charge their account all day, but if they do end up getting something, that’s the part that will slow us down is getting that contribution from the owner sometimes.

Chris McAllister: But legally, we’ve got to give that tenant their money back within 30 days. And we seldom, I don’t know that we ever have an issue with an owner getting that back. But I’m sure there have been times where, you know, again, we’ve had to, you know, come out of pocket from someplace else to, in effect, Take care of a tenant and our legal obligation is the property manager and then get reimbursed from the, from the owner.

But that’s not something that, uh, I like to do. We 

Gretchen Mitchell: never want the tenant to feel that there’s any, any struggle getting the money. It’s not the tenant’s 

Jill McGregor: issue. 

Chris McAllister: Yeah, it’s not the tenant’s issue. And you know, it’s, it’s, it’s, it’s our liability as much as it is the owner. So, so having said that in Ohio, in Florida.

There is no choice in Florida. All tenant security deposits are required to be held. And essentially a third account, which we refer to as the tenant escrow account. So when a new tenant moves in, in a Florida property, that deposit goes into that second account. It sits there until such time as the lease is over and they choose to move out.

And then, uh, either money can be held back with a, with an accounting, uh, of what the charges are, or that money comes straight out of the trust account within X number of days, and it’s paid back to the, to the tenant. 

Gretchen Mitchell: And you know, not to like digress or get kind of get off the subject, but the um, owners sometimes have a hard time understanding that the security deposit is not actually income when they get it.

That’s exactly, 

Jill McGregor: I was going to add that. It’s hard, the security deposit doesn’t become income until the tenant moves out. And it would be forfeited by the tenant. That’s when the income actually happens for the owner. So if you have, we’re just going to use a really easy scenario. You have a tenant who paid a thousand dollars security deposit.

They are there for five years and then they leave it damaged. And we keep the thousand dollars. Now, five years later, that thousand dollars is income to the owner, not when it was collected five years ago. And that is hard for the owners to understand. Um, I think that’s why as a property management owner, Even though it wouldn’t be required in my state, if I owned properties, I would have a separate account to put security deposits in.

And I think that would, you know, we can’t do it, we don’t have to legally do it at Roost as the property management company, but the property management owners. Can create a savings account or it doesn’t even have to be a trust They could just create a savings account to keep those security deposits that are given to them Separate so when gretchen calls and says I need that thousand dollars back.

They left your property in perfect condition It isn’t um taking from their operational accounts. I mean this really you can take this Um property management and operational account down a level yet to the owner level where they may need, you know, but that’s again, kind of getting on another, another tangent.

But 

Gretchen Mitchell: sometimes owners want us to set a reserve for that amount, just in case. 

Jill McGregor: Yep. And we can do that too. That’s a good solution. That’s the alternative solution to having them manage the money on the outside is to have a reserve. 

Chris McAllister: So the next thing you want to talk to your prospective property manager or if you’re reassessing your existing relationship, you want to talk about and ask about rent collection and distribution.

So, you know, rent is collected and managed through the trust account like we talked about, and then out of that trust account, disbursements are made. Right. According to the property management agreement that you’ve signed. So the disbursements would include, you know, property expenses, repairs, and so forth, owner payouts, management fees, taxes, mortgages, if your property manager is paying mortgages, whatever.

So you want to talk, you want to talk to them about and just make sure that they’re aware of how that whole process happens. And again, When does it happen? Is it at a set date or is it at any time that they get to it throughout the month? And I am proud to say that we have never, ever, ever, and what, since we’ve been doing this since 2009 or something Gretchen?

Yeah. 

Chris McAllister: We’ve never missed a check, correct? 

No. 

Chris McAllister: We’ve never had an owner not get paid, expected to get paid. Um, now just to be clear, If the 10th falls on a, uh, uh, Saturday, Sunday, or a Monday holiday, then that check run gets pushed, you know, to the, to the next business day. But we’ve never missed a check run.

We never will miss it, miss a check run. And that’s a good thing. You want to ask that maybe that question that you want to ask is, have you ever missed the check run? Payment of property expenses. So all property related expenses get paid from that trust account. So that should simplify things for your property manager and for you.

You want to be, you know, find out what their take is on financial transparency. And record keeping, so detailed expense breakdowns and preventive maintenance records are kept to support your tax deductions and budget planning. As Jill mentioned, ensuring 1099 miscellaneous forms are issued correctly to contractors is another critical aspect handled by a good property manager.

So is there anything else, Jill, that we need to add about 1099 or our process for 1099s? 

Jill McGregor: I think people just need to be familiar with the 1099 process and it is a little different for, you know, owners receive 1099 for the rental income, but then we also issue 1099 for the vendors who perform the property management services.

on behalf of Roost, right? The plumbers, the HVAC, the siding, the contractors, they all get 1099s, um, to support that business expense on the properties. So, um, and it’s anything over 600. It’s a very low threshold. Um, the threshold has not changed for decades. So if, if you just know that that’s part of your property management If your property manager does that, issues the 1099s, that’s part of the property management fee because it is time consuming and it is something that has to be done properly and, um, mostly it’s time consuming.

Chris McAllister: What, um, what do our owners get from us at the end of the year in terms of 1099? 

Jill McGregor: They get a 1099, um, they get a 1099 miscellaneous also, but it’s in a box that’s literally labeled rent. income. So it’s, it’s very specific. It’s not just because they received income for anything, it’s actually called out on the 1099 as rent income.

So they receive a very similar document, um, and that should be shared with their tax accountant because that is what is being reported to the IRS as their income from Roost. And so their tax accountants need to see those 1099s along with the owner statements. 

Chris McAllister: Does Section 8 also issue a 1099? 

Jill McGregor: They do.

Gretchen Mitchell: Yeah, so, but Section 8, it’s a little bit different. Um, Section 8 in Columbus will 1099 the owner. Section 8 in Clark County, Springfield, they will 1099 roost. 

Jill McGregor: Yes. So it depends where your Section 8 is coming from. 

Chris McAllister: So how do we make sure that this so we I assume we make sure that the 1099 that we issue the owner doesn’t include 

Gretchen Mitchell: correction.

Correct. So we have a GL account that’s Section 8 exempt and Section 8. So we separate it out. Yes. 

Jill McGregor: And so when we go to pull when at folio runs the rent income for 1099s, it knows which GL accounts to look at. And it is only for those Rent income, and then the correct Section 8 that needs to be included, because you may have an owner that has properties in Columbus and Clark County, and then we really have to separate and make sure which Section 8 is being included, but we do that through the specific GL lines.

Gretchen Mitchell: Yeah, but truly Green County, Licking County, Montgomery County, Champaign County, Clark County, Franklin County, they’re all different. 

Jill McGregor: They’re all different. Every county is different. And so we know which we know whether which GLT use for Section 8 to make the 1099s correct. 

Chris McAllister: A lot of questions to ask. Now my head.

Jill McGregor: It’s an interview process. It really should be because There’s a lot on the line when it’s not done correctly. 

Chris McAllister: And maybe the key question to ask this prospective property manager is, would you mind spending 15 minutes with my accountant? She 

has 

Chris McAllister: questions. All right, so let’s talk a little bit how we do it.

So at, at, uh, at Roost Real Estate Company, we happen to use Appfolio as our management and accounting platform, and that allows for both tenant portals and owner portals. We used a couple of different types of software prior, but we’ve been with Appfolio, gosh, I think for, Well over 10 years now. 

Gretchen Mitchell: 2014. 

Chris McAllister: 2014.

So 10 years. Yeah. And as we talked about, we do check runs and make owner disbursements on the 10th and the 20th of every month or the next business day if the 10th or the 20th falls on a weekend or a federal, federal holiday. And we’re lucky that we have enough scale that we’ve got Angela Josie Kelly.

Jill, you know, Gretchen to, you know, look after this stuff and allow me as the broker to sleep nights. So it’s, it’s a great question to ask is who handles your accounting? Do you have a team member that handles it? Do you have a third party handle it? Or do you, uh, Mr. Property Manager, do you try to do that yourself as well?

As far as our owners go, you know, I, I don’t think we’ve ever, ever, ever had a question that, you know, Gretchen couldn’t answer, Josie couldn’t answer, or Jill couldn’t answer. We’re well beyond that, thank goodness. And again, we’d love to have you take a look at the Loom video Gretchen and I did that kind of walks us through the, walks everybody through the portal so they know what it looks like and they know what to expect.

The other thing I want to put in the show notes is, um, well, you can watch it in the Loom video, but you can also, we’ll also put a link to a sample. Um, owner statement. So you can get a look at that and see how what we provide our owners and you can use that for comparison purposes for whomever you’re talking to 

Jill McGregor: back to your comment about there aren’t questions we can’t.

We haven’t been able to answer. Our owners ask great questions, though. And we often end up providing education for our owners, um, and I think that’s just a reflection on the owners. They have lots of questions, and you have to have a team that is willing to take the time to educate the owners, because 99 percent of their questions are really just a matter of education, and which is why Kelly, Gretchen, Josie, Angela, I, we can, we always find the answer to the question.

It’s education. So, I think that’s another really good question for property owners to ask their property management company is what, you know, what kind of education, what can you offer, and if I have questions, who do I go to to learn about these reports and to learn what you’re providing? I 

Chris McAllister: just flashed on a bonus question.

And the bonus question is, how do you 

handle prepaid rent? 

Jill McGregor: That’s what I was going to say, the 

Gretchen Mitchell: answer is always prepaid rent. 

Jill McGregor: The question is always prepaid rent. So prepaid rent, it really only matters in December. It really matters in December and January. When a, and this 

happens to be December, 

Jill McGregor: when a tenant.

Is doing their very best to pay their January rent. But let’s say January 1st falls on a weekend. So they bring the check in on December 26 because 1099s, according to the IRS, this is an IRS rule. This is not a Roost real estate rule. This is not a Jill and Gretchen rule. This is an IRS rule. If the cash is received into the trust account in the calendar year, it must be on the 1099.

So if you have 12 months of rent at 1, 000. 12, 000 and somebody brings you January rent on December 27th and it gets deposited, I must report 13, 000 on the 1099. Now, the following year, theoretically, you would only have 11, 000 on the 1099 because January was reflected. But the problem is rent, prepaid rent is perpetual because January and December happen every year.

Yeah. 

Jill McGregor: So, the best way to handle it? It’s not to accept prepaid rent, but that isn’t always an option. The second best option is educating our owners with their 1099 when prepaid rent happens. And prepaid rent does show on owner statements. Um, and so it’s really a matter of education back to my point earlier, it’s very rarely a question, a procedural question that we have to find out.

It’s more, how do we best educate the owner and prepaid rent is the number one thing we educate owners on. 

Chris McAllister: Yeah, that’s always a huge thing at the end of the year and it should only happen once right because you know if it’s the first year with an owner, they might get paid 13 times, but they’re only going to get paid 12 times.

Yeah. 

Jill McGregor: Yeah, until the final year, until the final year. And we have had that question. I had like, why is all of my rent not here? Well, they moved out. You had no more rent, but they had prepaid one month last year. And it’s like, Oh, Okay, they love that. Oh, 

okay. So you get 13 the first year 

Jill McGregor: and then in 

the middle year or 12 in the middle years, 11 in the last year.

Yeah. If 

Jill McGregor: it was a full year, of course, but yeah. 

Yeah. That’s my favorite question. 

Jill McGregor: So it would prepaid rent in May, June, July does not make a hill of beans a difference because it’s, it’s a cumulative for the year. It’s only 

Chris McAllister: in December. 

Jill McGregor: It’s only in December for January rent that it actually matters. But it meant, ’cause it shows 

Chris McAllister: up on the 10 99, it 

Jill McGregor: shows up on the 10 99.

Chris McAllister: A lot of questions. 

Laci LeBlanc: A lot of questions. I think this is a really good example of how working with a property management company that is, um, operated by property owners, investors, uh, is such an advantage because you all have these questions, Chris, Gretchen, like you have these questions for yourselves. Yep.

And you’ve worked hard to find the answers for yourselves. So when somebody asks. Um, you know, you’re, you’re super knowledgeable about it because you deal with this in your own own properties. And I think that’s a really big advantage. 

Jill McGregor: And we make a big deal out of prepaid rent because it’s the number one question.

But last year, out of the 357, I believe somewhere, roughly 350 owner 1099s, we had less than 10 questions. 

Yay! 

Jill McGregor: And I guarantee you six of them were prepaid rent. There’s always a few things. But really in the big scheme of things, 10, 10 owners had a question out of 350. This team, because the accounts payable and the accounts receivable team do their job every month correctly, and because things are being allocated correctly, and because things are tied out and communicated to monthly, we don’t get a lot of questions at the end of the year.

We really don’t. 

Chris McAllister: But if we do, we’re ready. 

Gretchen Mitchell: Yep. 

Chris McAllister: All right. Anything else before we conclude today? I 

Gretchen Mitchell: don’t think so. 

Chris McAllister: All right. Well, the Property Management Trust account plays a vital role in the ethical and efficient management of rental properties. It ensures the proper handling of funds, maintains financial integrity, and complies with legal requirements which are essential for protecting the interests of property owners, tenants, and your property management company.

If you or your accountant have any questions, your property management company should be there to help. So I want to thank you for joining us today on this deep dive into the critical financial aspects of property management. If you’re evaluating a potential property management company or reassessing your current one, it’s crucial to ensure they adhere to the highest standards of financial management and transparency.

If you have any questions about today’s topic, or if you’re looking for advice tailored to your specific situation, I invite you to reach out our website, visit our website at investwithroost. com. You’re going to find a lot of resources. Um, uh, there that’ll answer a lot of your questions or you can connect with us directly to, um, schedule a conversation.

We’re here to help you make informed decisions that maximize your investment returns and safeguard your property assets. And don’t forget to subscribe to the Landlord Profitability Playbook podcast on your favorite platform for more insights and updates and share this episode with fellow investors or leave us a review.

We’d love to hear your thoughts about how we can get better. Thank you so much.