Investing in a rental property can be a great way to generate consistent recurring income, but it’s not an entirely passive investment. Any rental property requires management.
When you think about managing a rental property, you might think about maintaining the property and handling tenant relationships. But there’s also the matter of finances and bookkeeping. A rental property is like a small business; funds are coming in and going out, which requires some banking and accounting responsibilities.
Whether you manage the property yourself or hire a property management company to do the work for you, financial work needs to be done. So, how should a property manager handle tenant and owner funds?
Accurate records must be kept for all rental income, security deposits, maintenance expenses, tax bills, and miscellaneous costs. Tracking of all income and expenses should also be at a fingertips’ length in the form of monthly statements and year-end records for tax purposes. For example, if you own a rental property in San Jose, CA, the company you hire to provide property management in San Jose should be able to provide accessible, up-to-date records for:
- Payments to the owner – It should be clear on what day of the month rent payments are mailed or deposited, as well as whether direct deposits are available. The rental owner should also know whether rental funds are immediately transferred or held until the end of each month.
- Taxes – Questions a rental property owner should ask when considering hiring a property manager include whether or not the management company makes tax payments on behalf of the owner, whether the company maintains information on all expenses that affect tax considerations, and if they advise the owner on possible tax deductions. Not receiving proper advice or meticulously kept records can cost a rental owner a lot of money in taxes.
- Accounting – When you consider using property management services, be sure to inquire about what is included in their accounting. Do they keep detailed monthly and annual records? Do they provide copies of all accounting forms and invoices associated with the property? Ideally, you want a secure online portal you can use to access all financial records pertaining to your property.
Keeping accurate records is one thing but reporting the information to the property owner is often another. Every property management company should provide the owner with detailed income/expense statements for each property under management. Typically, such statements are generated on the same date each month, and the owner gets them consistently around that date.
Most, if not all, Santa Clara County property management companies offer owners online access to all their statements and reports on a secure account. This adds convenience and transparency for the rental owner and might be a deal-breaker when choosing a property manager.
You’ll also want to ensure that the management company’s reports meet your expectations. Before signing with a property manager, you can request samples and ensure that monthly rent, late fees, lockout fees, and itemized maintenance expenses are included.
Managing Security Deposits
Another valuable function of a property manager is the management of security deposits. Security deposits offer financial protection for the rental owner’s investment and can aid in motivating tenants to take good care of the place. But specific laws must be carefully followed when it comes to security deposits.
In California, the maximum security deposit an owner can charge is the equivalent of two months’ rent for an unfurnished unit and three months’ rent for a furnished unit. Owners may also legally ask for extra deposit funds for waterbeds and pets.
Existing law also requires security deposits to be refunded within 21 days of move-out. Property owners are permitted to deduct from the deposit for unpaid rent, damage beyond normal wear and tear, and a cleaning charge if the unit is not as clean as when the tenant moved in.
Landlords must also provide an itemized list of any deductions, which means a thorough walkthrough — with photo documentation — must be completed before move-in and again when the tenant moves out. An experienced property manager will correctly handle the process and the finances of security deposits on behalf of the owner.
The Bottom Line
A fair amount of work is involved with managing tenant and owner funds for a rental property. Most rental owners use the services of a professional property management company to handle all the aspects of managing a rental. This gives rental owners more peace of mind and less stress than managing their rental property. Valley Management Group provides property management in San Jose and throughout Santa Clara Valley and handles all the issues associated with managing rentals. If you own rental property in San Jose or a nearby community in Santa Clara County, contact Valley Management Group. Get a free property management quote and one free month of management services when you sign up.