Your property manager’s accounting cycle isn’t something that most landlords think much about, but it has far-reaching implications into the quality of management you receive, including how timely and reliably you receive your rent checks each month. There are two basic accounting cycles used by property management companies. In this article, I’ll discuss some pros and cons of each type and explain the reasons (and benefits) for the one we’ve chosen.
What is an accounting cycle?
An accounting cycle is the series of activities and procedures that a business follows when processing financial transactions. It typically begins with the receipt of each month’s “receivables” (income), “payables” (bills) and any other financial transactions, the processes for entering them into journals or accounting software, the disbursement (payment) of such expenses and transactions, and concluding with their entry and publication in the final monthly accounting statement. The company’s own business expenses such as electricity bills, office rent, phone service, internet service, etc., aren’t applicable in this article’s context. We are not discussing the management company’s bills; we are looking specifically at the accounting relative to each rental property and the landlord who owns it.
The Monthly Accounting Cycle
The majority of the world’s businesses run on a monthly accounting cycle for regular income and expenses. This means that all of their income, receivables, and payables are received, documented, paid, and settled all in the same month. Because a property manager acts on behalf of others, the bills received and paid on behalf of the property and landlord are almost always paid out of each specific property’s rental income, in conjunction with the rent received for that month. So, as a monthly accounting cycle relates to property management, rents are due (note due, not necessarily received) on the first of the month, the income is documented and posted to the property ledger, the payment is deposited into the property managers bank account, the manager waits for it to clear their bank, bills are then paid, a final accounting ledger is prepared, and the owner is sent his or her check for the balance at the end of the month.
The Compacted Accounting Cycle
Primarily due to pressure from the landlords who want to receive their rent payment as quickly as possible, the majority of property management companies use a “Compacted” accounting cycle. To explain the compacted accounting cycle briefly, take all of the processes and procedures outlined in the previous paragraph and condense it down into a period of roughly two weeks. This means rents are due (not necessarily received) on the first, deposited and cleared as quickly as possible, bills are paid as quickly as possible, and the owner payments are made, again, as quickly as possible, usually by the middle of the month. When there are no hiccups, this cycle works somewhat decently; but anyone who has ever managed rental properties knows hiccups are all too common.
Advantages and Disadvantages of the Monthly Accounting Cycle
Done correctly, there are far more advantages to this type of accounting than any other. By having a full month to handle the financial matters of each property, the property manager has more “breathing room” and flexibility in his or her ability to successfully manage the property. Unfortunately, not all renters pay on time. Chasing late rent takes time. Likewise, not all bills come in during the first week of the month. If a renter pays late, the monthly cycle allows the property manager adequate room to chase the late rent without causing a delay in paying to the landlord. Landlords ultimately prefer this method, because they are almost always guaranteed to receive their payment the same time each month, even if the tenant pays a week or two late. Furthermore, it allows the property manager to have “funds on hand” and pay bills that come in during the second half of the month, before owner checks are sent and the accounting cycle is closed. By having funds on hand to pay for repairs quickly after the bills are received, it keeps the repair personnel and contractors happy and “working hard” for the property manager’s business. This is tremendously beneficial to everyone… but specifically to the owner, the renter, and the property manager. By giving repair personnel the confidence they’ll be paid promptly, they’re much more likely to give us priority over other jobs, particularly in cases where time is of the essence. When they know they’ll be paid fast, they’ll respond faster, get the job done quicker, and often provide a higher level of service.
Advantages and Disadvantages of the Compacted Accounting Cycle
When using the Compacted Accounting Cycle, the only person who perceives a benefit is the owner… and it often puts tremendous pressure on the property manager. But even though the owner may perceive a benefit, they’re not guaranteed to have it every month. I use the word “perceive” intentionally, because it’s not a real benefit. Getting it often comes down to a matter of luck. If the owner is used to receiving his or her rent payment by the 15th, even a 3 day late rent payment (which is all too common) can cause as much as a 4 or 5 day delay in the owner receiving their money. Since many landlords have a mortgage, I can’t tell you how many times the landlord begrudgingly reminds me “my mortgage is late if I don’t get my rent by the 15th.” I’ve struggled so many times to instill in landlords that my rental accounting and their mortgage payment have nothing to do with each other… but I can assure you that each and every owner hates getting their rent late. Another problem with the compacted accounting cycle is that, effectively, it leaves the property manager broke for the second half of the month. This is not a good thing for anyone, especially the landlord. Remember, the management company pays the property bills out of the rent. If there is a repair to be made in the first half of the month, no problem… but if a repair has to be made during the second half of the month, after the owner payment has been made and the accounting cycle is closed, either the property manager has to (1) pay for the repair out of his or her own pocket, (2) ask the landlord to urgently send money to pay for the repair, or (3) pay the contractor late. None of these are attractive or easily workable options, and they all serve to undermine the smooth and efficient operations of the management company, which are ultimately, and supremely, important for the renter and landlord both.
Having done things both ways, and in full consideration of the interests of the landlord, our preference at Management 1 Tri-Cities is to use a Monthly accounting cycle. The biggest advantage for the owner is that they are rarely paid late. They can count on getting their rent on or about the first business day of each month, each and every month. Also, they almost never have to send “overnight” payments for an emergency repair that occurred in the second half of the month when the property manager doesn’t have cash-on-hand. The property manager isn’t overburdened by floating hefty repair bills until the next rent check comes in, contractors can be paid promptly, keeping them happy and working hard for us, the tenant is happy to get repairs made quickly, and the owner can almost guarantee their money will arrive on time.
What Can You Expect?
When we rent your home, the first payment you’ll receive will come at the end of the same month the tenant moves in, having the first management fee and placement fee deducted. From that point forward, you’ll receive your rent payment at the same time each month, on or around the 1st (depending on weekends, holidays, etc). If your renter pays late, we’ll have plenty of time to chase the late rent, charge and collect the late fee (which is extra money to the landlord), and pay all the bills in a timely fashion. You won’t have to worry if your renter pays late, that it might cause an unexpected delay in getting your money. This makes managing your property predictable, reliable, and time-sensitive. If your renter does pay late, you’ll still get your money on time, plus you’ll see the extra late fee charge, which is essentially “free” money to you. If we determine the renter isn’t going to pay and an eviction is necessary, all of this will happen BEFORE your rental disbursement is due, not after, giving you some time to prepare. At Management 1 Tri-Cities Realty & Property Management, we offer lower fees than most, if not all, of our competitors. By using more efficient accounting practices, it allows us to charge lower fees without compromising quality or service and pass those savings back to you. We think this adds value in our property management service to you. If you have any questions about how our accounting cycle can make being a landlord easier for you, contact us today. We look forward to making your landlord experience the best it can possibly be.