Rental property owners who hire property managers or property management companies to manage their real estate investments should always adopt a few simple internal controls to ensure compliance with their wishes.  Property managers typically collect the rents, pay the bills, oversee repairs and maintenence of the properties, find and qualify tenants as well as evict delinquent tenants, etc.; however, many fail to perform these and other functions expected by the owners in a faithful and timely fashion.  In particular, as a Certified Public Accountant, I am surprised to witness how many property managers fail to make an accurate and regular accounting of their fiduciary responsibility to the owners or investors of the properties.

Property owners should expect and receive monthly reports from their property managers.  Typically the reports should include the following:

1.    Monthly profit and loss statement;
2.    Tenant receivables report;
3.    Accounts payable report;
4.    Bank reconciliation (if the property manager has a checking account for the properties);
5.    Copy of the monthly bank statement.

When capital improvements need to be undertaken, often the property manager is entrusted to function as the construction manager of the work.  Consequently, additional reports would be required.  For instance, they may include:

1.    Work-in-progress schedule;
2.    Bank reconciliation for the capital improvements transactions;
3.    Copy of the monthly bank statement for the capital improvements account;
4.    Cash flow projection for the remaining improvements.

Property management companies often have many clients and after paying lip service to boasting about their excellent service, after you sign a property management agreement, you often find them failing to follow up on these reports.  Sometimes you find bills for services without sufficient substantiation, if not unreasonable or questionable in amount.   Or you may find your property management fees more than what was originally agreed upon, since the fox is in essence guarding the hen house.  Therefore, as an owner, you must always be vigilant and maintain control over the property manager.  Remember you own the properties and you are always the boss and ultimately in charge.

The most effective means of ensuring control over the management of your properties is to maintain control over the cash.  But you may wonder how can you control cash if you want your property manager to collect the rents and pay the bills?  Easy.

Set up at least three bank accounts:  an operating bank account, a securities deposits bank account and a rental receipts bank account.  The property manager would have unlimited access to the operating bank account in order to pay the customary expenses of operating and maintaining rental properties.  However, no deposits from rental receipts, late fees, or other miscellaneous sources would be permitted to be made to this account for operations.  Rather, all rental receipts and other sources of income would be made to the rental receipts bank account, from which only you would have access to make withdrawals or transfers.  After receipt and review of monthly reports, bills, requisitions, etc., from the property managers, you would simply transfer sufficient funds from the rental receipts bank account to the operating bank account to authorize the payment of those invoices approved by you.

Typically security deposits are required by state law to be escrowed in a separate bank savings account where interest is earned.  Again, property managers would deposit all security deposits into these accounts and only you would have access to these accounts for any withdrawals or transfers.  In some states you may be required to have individual securities bank accounts for each tenant.  Check with your attorney and state law for further guidance on this requirement.

If significant capital improvements are to be undertaken, it is advisable to have a separate bank account for these expenditures as well.  Again, only the owner should have access to this bank account in order to transfer monies to the operating bank account after the work has been approved for payment.  As with any construction work, purchase orders, contracts, requisitions for payment, certificates of insurance, Form W-9, invoices, inspection reports, etc., should be received, reviewed, and approved by property owners before transferring any monies into the operating bank account for payment of any capital improvements.

By establishing separate bank accounts for operations, receipts, deposits, and improvements, and by only allowing the property manager access to those of operations—and only after receipt of monthly reports and documentation supporting all expenditures of significance and interest—owners can exercise more control over their property managers and their investments.  Moreover, a quick glance at your current balance in each of these accounts can often tell you if and how well receipts and security deposits are being collected as well as how much funds have been expended in improvements to-date. By requiring and receiving accurate and timely monthly reports, property owners may avoid unnecessary expenses and losses and enhance their survival during these very difficult economic times.. 

 

From: http://www.cpa-connecticut.com