A short while ago, I wrote a quick article about bookkeeping basics for a financially successful business. We got to talking about it around the office and someone suggested that I say a bit more on keeping your company books in the black.
You can think of property management income and expenses as the fundamentals of property management accounting. Keeping it “in the black” is a phrase that means you’re making a profit. That is, when you look at your company’s income statement—also called a profit and loss statement (or P&L for short)—you see a positive amount on the net income line. In contrast, “in the red” means that your net income is negative for the period.
Property Management Income Statement
The key to a profitable business is making sure that you’re always bringing in more money than you spend. So let’s talk about the property management income and expenses that you’re likely working with.
Property Management Income and Expenses
Property management companies have several sources of revenue that feed the top line of their income statement. Depending on where you’re located, some of these income sources might have rules and regulations. For example, late fees are highly regulated: if or when they can be charged, how they should be structured, who keeps them, and how much they can be.
Different rental markets have different trends. What works in Boston, MA might not work in Portland, OR.
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|Income source||What is it?||Who pays it|
|Management fees||A standardized fee for performing normal property management duties—usually a percentage of the rent (or a flat fee for associations).||Rental owner or association|
|Maintenance markups||A surcharge for acting as a general contractor on maintenance items—usually a percentage of the total property maintenance bill.||Rental owner or association|
|Finder’s fees||A fee charged for finding a new tenant for a vacant unit. This fee is usually paid by the rental owner in weaker rental markets, and paid by the applicant in stronger ones.||Applicant or rental owner|
|Rental application fees||A fee charged to cover the costs of tenant verification.||Applicant|
|Lockout fees or “re-key” fees||A penalty fee if the tenant locks themselves out or loses a key. This is especially common in student housing.||Resident|
|Out-of-lease surcharge||A fee designed to encourage a tenant to sign a long-term lease.||Resident|
|Non-sufficient funds (NSF) fees||A penalty fee meant to deter fraudulent payments, and to cover associated bank fees.||Resident|
|Late fees||A penalty if rent, association fees, or some other assessed charge isn’t paid on time.||Resident|
It turns out that there are many ways in which property management companies spend money as well! Some of the most common culprits are:
|Expense||What is it?|
|Payroll and contractor fees||Paying your employees or contractors|
|Rent||Rent for your office space|
|Supplies||Office and maintenance supplies|
|Utilities||Water, electric, and HVAC bills|
|Bookkeeping||Many property managers work with an accountant, especially at tax time|
|Service fees||Buildium property management software, tenant screenings|
|Membership fees||Industry organizations like NARPM; Chamber of Commerce|
You should be vigilant about keeping up-to-speed on your “net income” (revenue minus expenses). Watching this figure on a monthly basis makes for good fiscal hygiene.
Another fundamentally sound practice is to continually think about growing your client base. Even if you’ve got a rock-solid base of clients, it’s still likely that you’ll lose a client every now and then. This can happen for reasons completely outside of your control. For example, the real estate market could get stronger, and a landlord might want to sell their rental property. Nothing hurts the top line of an income statement like fewer clients; so hedge against that outcome by implementing consistent growth strategies.
Did we miss anything?
Tell us in the comments.