A Quick Guide to Keeping Property Management Records

Keeping records on hand is important for a number of financial and legal reasons. Just because you’ve paid off an account or a tenant has vacated a unit, it doesn’t mean that you’ll never have cause to deal with these vendors or individuals again. Whether it’s for taxes, future loan applications, or legal issues down the line, you always want to be sure you have access to the information you need at any future point. Following are a few things to keep in mind about keeping records.

What kind of records do I need to hang on to?
As a business owner you will want to hang on to records that pertain to:

• Personnel
• Tenants
• Financial transactions (both payments received and payments made)
• Property-related information (both your properties and your clients)
• Insurance
• Legal documentation
• Audit documentation

How long should I keep records for?
The answer is: It depends. While the default answer for this question tends to be “seven years,” that is only the case in certain instances. Different types of records should be kept for different periods of time. Standard time periods include one year, three years, seven years, and, in some cases, permanently. As it relates specifically to property management, you will want to keep the following information for these specific periods of time:

One Year

• Employee applications
• Purchase orders
• Meeting minutes

Three Years

• Banking records
• Expired insurance policies
• Correspondence (with clients, tenants, real estate agencies, vendors, etc.)
• Internal audits

Seven Years

• Accident reports/claims
• Accounts payable ledgers
• Accounts receivable ledgers
• Bank statements
• Expired contracts and leases
• Employee records (seven years post-termination, not beginning of employment)
• Expense reports
• General journals
• Invoices (both incoming and outgoing)
• Payroll records
• Purchase orders

Permanently

• Articles of incorporation
• External audits
• Canceled checks for property purchases and taxes
• Deeds and mortgages
• Year-end financial statements
• General ledger balances
• Licenses and permits
• Property appraisals
• Property records (costs, blueprints, etc.)
• Tax returns

Happily, thanks to digitization, keeping all these records doesn’t mean that you need to have stacks of boxes clogging up office space. Many of the items included in this list can also be kept electronically. Remember, though, computers crash and are replaced over time and records can go along with them. Particularly when it comes to records that should be kept for longer periods or permanently, make sure that they are electronically preserved either on an external drive or on a secure server. If your records are overwhelming (or if you want to digitally archive all old records in one fell swoop) outside contractors that specialize in this function can be hired. Hard copies of vital records (such as deeds, mortgages, and property records) should be protected in disaster-proof climates, such as a safe or vault.

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Renovation vs. Rejuvenation

To generate more rental income, it’s sometimes necessary to put a little work into your property. If a potential renter is comparing your property to a similar, less expensive property, the renter will need to be able to easily identify those aspects (whether it’s aesthetics or features) that make your unit worth more than the competition’s. Depending on where you’re starting from and where you want to go, upgrades may consist of as little as some simple “rejuvenation” projects or, alternatively, some larger-scale renovations.

Generally speaking, your bathroom and kitchen are two key areas that play a large role in making or breaking the value of your rental unit as compared to competitors’. All other factors being equal (such as size and location), chances are most renters will select the unit with a nicer looking or more upgraded bathroom or kitchen. Many renters will even be willing to pay a bit more if there is a noticeable difference or greater utility in one or both of these two rooms. In other words, these are the first places you should make improvements if you want to command additional rental income for your property. What does this mean exactly? Let’s take a look.

Renovation
There’s not really any way around it—complete renovation of a bathroom or kitchen (appliances, lighting, tiling, fixtures, etc.) will cost you a few thousand dollars. However, it will also likely pay off in the form of a higher rent rate.

Consider a renter who is looking at your apartment and another similar one in your neighborhood. The apartments are the same size and age. However, your apartment has a new, updated kitchen complete with a dishwasher, updated appliances, new tiling, flooring, and lighting. Similarly, your bathroom has recently been redone—new tile, new tub, new sink, the whole nine yards. With all of these new upgrades, it’s likely that you can now command up to an extra $200 per month, depending on the rental market in your area. With that in mind, even if you spend a few thousand on each room, you will earn your investment back quickly because of your new-found ability to command a higher rent rate.

Rejuvenation
Let’s say that you simply don’t have the desire (or the financial resources) to make these overhauls. You can still drastically improve the aesthetic appeal of your units by making smaller changes that have a big impact. For the kitchen, put in new countertops, flooring, or up-to-date hardware on cupboards and drawers—this is a great way to modernize a dated kitchen, and can be done fairly inexpensively. Similarly, you can put new faucets and lighting fixtures in the bathroom or perhaps update the mirror for a more modern look. You can also consider re-doing bathtub porcelain with Miracle Method, which will cost far less than replacing the tub altogether.

Changes like these are far cheaper than a complete overhaul (a few hundred dollars as opposed to a few thousand dollars) and will still allow you to raise rent prices, though perhaps less significantly.

In addition to renovating or updating bathrooms and kitchens, remember that flooring or carpet should be thoroughly cleaned, waxed, or polished (or replaced if necessary). Particularly when showing vacant apartments to potential tenants, flooring provides a clear indication of how well-kept your unit is and adds to aesthetic appeal. The better impression you make, the easier it will be to command the rental rate you desire.

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Staff Versus Software Links!

If you’re overwhelmed with the amount of work to be done at your property management company, hiring additional staff is a logical place to start. Before you rush out and post a Craigslist ad, consider the type of work that’s really drowning you — is it maintenance work and showing units to potential tenants, or more administrative type work? The links below will help deal with the extra workload, whether that includes finding the right employee or the right software application for the jobs at hand.

• Entrepreneur.com weighs in on How to Decide When to Hire an Employee.
• If you are a small property management shop or an individual looking to grow your business by adding your first employees, this article from the Wall Street Journal is a great place to start.
• You’ve already decided that software can help save you the time you need by streamlining your more administrative type tasks. But should you be looking for web-based or installed software? 37Signals makes a case for web-based software.
• If you think that software is your company’s best bet, we’re a bit biased towards Buildium. You can hear more about our property management software in this video. You might also want to check out the Buyer’s Guide provided by Software Advice.

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Staff Versus Software for Property Management

There’s no doubt about it—of all the business problems you could potentially have, being too busy is certainly not a bad option. However, being too busy can become a problem if you lack the bandwidth to stay on top of things. If you consistently find yourself putting off certain tasks or letting them fall through the cracks altogether, it’s time to make some changes. Being overloaded can result in a slip in the quality of the service you provide or oversights, both of which may guarantee you’re not so busy for long.

The obvious answer to too much work is bringing more hands on deck. But, of course, just because you’re busy doesn’t necessarily mean you have the budget to hire additional employees. Property management software may give you the extra help you need at a lower cost than an additional salary.

Multi-tasking Functionality
One of the great benefits of property management software is that it essentially acts as an office generalist. For example, hiring extra staff to take care of accounting work may alleviate that workload, but that same person can’t necessarily take on other tasks such as advertising. Modern property management software, on the other hand, handles a diverse variety of functions. It does accounting, allows tenants to make rent payments online, provides an advertising platform, runs credit and criminal checks, creates reports, and keeps records.

Cost-effective Investment
Property management software requires only a nominal investment when compared to hiring new staff and adding an additional salary to your payroll. Depending on what type of software and package you choose, you may pay an upfront fee, an annual fee, or a monthly fee.

Streamline Systems
A good property management software system will do away with redundancies. Rather than entering information multiple times for multiple purposes, you only have to do it once, saving time and effort. For example, when you pay bills through a software program, it simultaneously records the transaction for you.

Buy Time
At the end of the day, property management software essentially buys you the oh-so-precious commodity of time. Not only does it take care of calculations, notifications, and receivables for you, but it can also decrease the time required on your part to provide great customer service. By providing relevant parties with usernames and passwords they can both look up records and enter things like payments and maintenance requests by logging on to the software program (assuming you select a web-based program).

There are certain situations when taking on a new employee is required. If, for example, you need help performing property maintenance or showing units to potential tenants, no software program in the world will do the trick. However, if you simply have more administrative, accounting, or customer service work than you can handle, software may well be just the cost-effective, low-maintenance solution you’re looking for—no salary or extensive training required.

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Choosing the Right Business Entity for Your Property Management Business

The business entity you choose for your property management company will affect you in very real ways—especially when it comes to taxation and financial and legal liability. This is a big decision and one that you may want to make with the assistance of your accountant or attorney. Following are the four business entities most commonly used by property management companies and some basic information about each.

Sole Proprietor
The title of this business designation pretty much says it all—a sole proprietorship is a business owned by one individual. Unlike more complex options, sole proprietorships do not have to be legally registered with the state you do business in. Rather, a sole proprietorship’s existence is solely based on the fact that you’ve gone into business. In other words, it’s simple and free to set up.

Sounds too easy, right? Well, there is a drawback. Because you are one and the same with your business, business gains and losses are filed on your personal tax forms and, most notably, you are liable for the business, both financially and legally.

Partnership
A partnership is much like a sole proprietorship, but it involves two or more owners. As with a sole proprietorship, no paperwork or registration is required—you are simply in business. Again, partners claim their share of business income on personal tax forms and are held liable for the business’ financial and legal claims.

Limited Liability Company (LLC)
LLCs are a bit more complex to set up than sole proprietorships or partnerships, with paperwork and costs due upon establishment. One of the great benefits of a LLC is that (as the name indicates) owners’ legal and financial liability is limited. Note, however, that in terms of taxes, LLCs function more like sole proprietorships and partnerships—each owner pays taxes for his share of the business on personal tax forms.

Corporation
Corporations are completely separate from individual owners for taxation purposes—in other words, personal and business taxes are filed separately. Personal income gleaned from the business (salary, bonuses, etc.) are filed on personal taxes, but corporate income remains solely on the business’ tax forms. Likewise, owners are not liable for business finance and legal issues.

When setting up your business, think carefully about how various business designations will affect both your taxes and liability. Protecting both should be your primary consideration.

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5 Financial Ratios Every Property Manager Should Know

Whether numbers are your forte or not, there are certain ratios and calculations every property manager should understand. Following is a look at five key ratios that apply to your property management business, how to obtain them, and what they tell you.

1) Vacancy Rate
Your vacancy rate demonstrates the number of units available or unoccupied versus the total number of units available for rent on a property. The lower your vacancy rates, the better. The formula for this is simple:

Vacancy rate = Total number of unoccupied units in a property ÷ Total number of units in a property

This total can then be converted into a percentage.

While average vacancy rates vary from region to region, according to a January 2011 article on MHN Online, “[President of Axiometrics, Inc. Ron] Johnsey’s forecasts call for the average vacancy rate to drop in 2011 to 5.8 percent—a solid statistic considering apartment properties aim for vacancy rates of 5 percent for optimal rent increases.”

Note that your occupancy rate can be easily determined by subtracting your vacancy rate from 100 percent. For example, with a vacancy rate of 7 percent:

100% – 7% (vacancy rate) = 93% (occupancy rate)

2) Depreciation
Depreciation helps you determine how much value your property has lost over time due to age and wear and tear. Depreciation is considered an expense and will come into play as a write-off when completing taxes. Note that depreciation is completed over a 27.5 year period and applies only to the actual building on the property, not the land. To calculate depreciation:

Purchase price – Land value = Building value

—then—

Annual depreciation = Building value ÷ 27.5

3) Operating Expense Ratio
The operating expense ratio is simply the ratio between total operating expenses and the gross income of your property. This total amount shows how much of your property’s income is being used to actually support and run the property. Operating expenses include those expenditures that support the operation and maintenance of a property. Gross income is the actual yearly income—this may include not only rent, but also income from things like laundry machines and parking fees.

Operating expense ratio = Operating expenses ÷ Gross income

This total can then be converted into a percentage.

4) Capitalization Rate
The capitalization rate (or cap rate) will help you determine the actual value of a potential investment property, beyond the actual property’s more straightforward appraisal value. In other words, how much can you really expect to make off of this property, once expenses and operating costs are accounted for? To obtain this figure, you’ll need both the operating income and recent sales prices for comparable properties. Once you have both of these amounts, you can figure the cap rate, which will help you determine exactly how valuable a potential investment property will be for you or the potential property owner.

Cap rate = Sales price of a comparable income property ÷  Net operating income of comparable income property

This total can then be converted into a percentage.

5) Net Operating Income
Like cap rates, calculating the net operating income (NOI) of a property will help you determine how valuable it will actually be. In order to determine this figure, you will need to calculate both your gross potential income and vacancy and credit loss (in other words, the realistic loss of rental revenue due to vacancies, etc. based on previous years’ statistics). You can then complete the following calculations.

Gross operating income = Gross potential income – Vacancy and credit loss

—then—

Net operating income = Gross operating income – Operating expenses

Whether you’re attempting to gain a better understanding of where an existing property currently stands or how much a potential property investment will ultimately pay off, the black and white numbers provided by the formulas above will help provide a clear picture of how your current (or future) properties are actually performing.

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Business Blog Links

In our previous blog post we identified some of our favorite property management focused blogs — blogs with content covering issues like landlord-tenant relations, best practices for evicting tenants, property renovations to boost property value, and other topics specifically of interest to professional property managers or landlords. While these blogs are great resources to help you stay on top of your property management game, it’s also important to remember that you’re likely also running a small business. There are literally hundreds of blogs out there focused on helping small businesses prosper and grow. Coupling up-to-date property management knowledge with the latest in business know-how is a win-win scenario for your company.

1. Dharmesh Shah’s On Startups blog is one of the most widely read business blogs on the internet. The site specifically focuses on start-up entrepreneurs — perfect if you are in the early stages of growing your property management business.

2. Small Business Trends is the most widely read small business blog on the internet with over 114,000 subscribers via the site’s RSS feed. Needless to say, it’s a great resource.

3. HubSpot’s Internet Marketing Blog is a fantastic resource for learning to drive new business through online initiatives like search engine optimization, blogging, and social media. Best of all, most of these inbound marketing practices are free!

4. Getting the most bang for your buck out of blogs comes from finding blogs that you feel provide useful advice that are written in a style you enjoy reading. With this in mind, check out this list of the top 100 small business blogs on the internet.

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Educational Links!

With a variety of property management and real estate based TV shows recently becoming popular on channels like TLC, HGTV, and A&E, the average TV viewer is getting some valuable education by tuning in. Whether you are a first-time real estate investor or a property manager with many years of experience, these shows can be useful in helping you learn about the housing market in different areas of the country as well as in providing budget-friendly tips for flipping properties. With these shows as inspiration, we’ve included below a list of other educational resources for those of you who love these shows.

• Who says TV isn’t educational? In our previous post we also left out HGTV’s Property Virgins. Check it out to see first-time home buyers navigate the market.
• Sick of commercials? Not a big fan of television? Check out Richard Jorgensen’s The New No Nonsense Landlord. It’s a great guide for beginning property investors and provides sound best practices in property management.
• Are you getting serious about your property management education? IREM’s Certified Property Manager designation is among the most respected certifications in the industry.
• If you’re serious about property management, you’ve got to get serious about accounting. There’s no way around it. Our Property Management Accounting book is a great place to start.

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Book Review: The New No-Nonsense Landlord

Hi All,

Geoff here from Buildium. We already wrote a subletting links post last week in response to our To Sublet or Not to Sublet: A Property Manager’s Perspective post. That said, I figured I’d tell you a bit about a book I just finished reading; The New Non-Nonsense Landlord by Richard Jorgensen. The book focuses on the building wealth with rental properties, from the perspective of the individual real estate investor rather than from a property management company’s perspective. Regardless of this fact, I felt that this book was worth sharing — many property management professionals pursue rental properties as a means of building their own nest egg. Jorgensen writes in a direct and succinct manner, offering what I consider to be very practical and straightforward advice on building wealth through rental properties. He emphasizes hard work and efficient fiscal management, continuously downplaying the “get rich quick” schemes that are so prevalent in real estate investing circles.

I think that this book would be a great resource for any beginner investor. The book certainly opened my eyes to the benefits of owning rental property and motivated me to do so on my own. Whether you’re thinking of investing in properties of your own or not, Jorgensen offers several chapters worth of advice that speak directly to any property manager, including chapters on:

Managing Real Estate through a Crisis

Tenants: The Lifeblood of the Real Estate Industry

Establishing a Sound Credit and Collection Policy

Dealing with Tenant Problems, Complaints, and Rents

The text is very inexpensive and is available through amazon.com in both Kindle and print editions. It’s worth a read.

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New Year’s Resolution Links!

Remember that weight loss plan you took off on at the beginning of 2010? While New Year’s Resolutions often become laughably non-effective, there’s no denying that now is as good of a time as ever to at least conduct a review of your property management practices and create an action plan to improve upon your weaknesses in 2011. These links will identify areas of your property management practice to analyze and recommend some changes for new-found efficiency.

• In reviewing how your business did in 2010, you may want to conduct a thorough SWOT analysis. In fact, this might be a great end of year practice to work into your business annually.
• Many property management companies start off when someone relocates and decides to rent their own home, through an inheritance, or by some other indirect means. If this is the case, it may be worth writing out a formal business plan for your property management business.
• Not sure where to start? Chances are your tenants know exactly what you could be doing better. After all, these are the people who call your property home. A tenant satisfaction survey may provide just the insight you need.
• Let’s face it — nothing is more critical to running a successful property management business than knowing exactly where you stand financially. This property management accounting book will help to ensure that you understand your reporting and know where you stand.

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