Property management banking tips

Carla Toebe
Carla Toebe | 5 min. read

Published on February 21, 2012

In the world of property management, banking procedures are a bit more involved than simply having a bank account, making your deposits and payments, and balancing the register at the end of the month. I want to stress that every state’s laws are different; so always double-check your state’s laws before implementing the suggestions in this article.

The first rule of business is to establish a trust account with your commercial bank. Oddly enough, once you have sat through the session to get this going, do some telephone banking and ask the representative what kind of account you have set up to make sure it was actually set up as a trust account. Just because they tell you that it is a trust account doesn’t mean that it is. You have to follow up to make sure that the personal banker set things up correctly. You could find out the hard way that this account was never in fact a trust, even if you were told it was. If it isn’t a trust, then it will not be protected from potential seizure in the event of bankruptcy or other issues with separate personal or business accounts. Do your due diligence, and don’t rely on the initial set-up.

Additionally, you should not have any business operating funds coming into or out of this trust account. The account should only have tenant money or client money. All of this money should be attached to a property. At least once per month, you must pay out a monthly commission as stipulated by all management agreements. The checks should also state that it is a property management trust account, and the leases should state where and in which bank the security deposits are held. If the owner of the property is holding the security deposit, then you should hold back rental income in order to keep the security deposit in your trust, because you are responsible for that deposit while you are managing the property.

The security deposits may be kept in the same account as the rental income; but if you have many units with the same owner, then it is advisable to get a separate interest-bearing trust account and another trust account for the rental income. If you are dealing with multiple owners that do not have a large number of properties, then it is better to get a combined account for both rental income and security deposits. If you have an interest-bearing account, you should be transferring the interest each month into the regular trust account as interest income to the owner. You will need to transfer the security deposit into the regular trust account before you can pay the owner any money from the refund due to charges as well.

If you keep a combined account, all the security deposits must match the amount stated on the balance sheet; the rent roll must match the security deposit liability; and the cash in the register must match the accumulation of all the owner balances, plus the security deposits. You must balance the rent roll with the balance sheet and the register with the bank statement each month. Failure to do so could put you out of compliance with the state; and if you are not in balance each month, it could be a serious problem.

There should be two places for receipts: the computerized accounting system, and the handwritten deposit ticket for all of the payments. Copies of all checks should be kept, whether carbon or photocopied. Copies of duplicate deposit receipts should also be kept once the funds are deposited.

It is always a good idea to write a detailed process and policy for your property management banking to show that you are practicing due diligence with other people’s money held in trust. This way, anyone who handles the trust account is fully knowledgeable and accountable about the importance of practicing all of the state law requirements.

The rules, regulations, and customary practices vary wildly across the country. For example, in Washington, it is okay to commingle rent and security deposits in the same bank account; however, it’s a big no-no in Massachusetts; and in California, it’s customary for rental owners to hang onto the security deposit. Also remember that rules about reporting vary from state to state—i.e., if it’s not customary to get a full month’s rent as security, then your rent roll won’t tie to security deposit liability.

Clients put their trust in property managers and believe that they are doing the right thing. The way that you handle your banking will solidify this trust with both clients and tenants, thus keeping you out of trouble!

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Carla Toebe

Carla Toebe owns and operates CT Realty LLC in Richland, Washington.

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