Monday, January 4, 2016

Property Management Bookkeeping: How to Earn Income in Property Management


How to Earn Income in Property Management

As a property management company, you have several ways to earn income. If you are managing your own property, then this income is realized when a tenant pays rent for the month. If you are managing properties for other owners, then your company’s income will be derived from several sources.

Application Fees

For vacant units, you will need a way to review potential tenants for the possibility of filling the unit. Using an application provides the best means to screen candidates to find the best possible tenant. Most property management companies typically charge an application fee to offset the cost of purchasing a background check on the prospective tenant. That application fee usually includes a small mark-up which becomes income for the property management company.

Management Fees

If your property management company will be managing properties owned by a third party, then you will want to charge a management fee for providing your services. This fee should be negotiated prior to entering into a management agreement with the new owner.

As the property management company, you have two options for how you would like to receive this form of income when starting a new management agreement. You can require the new owner to pay in advance for several months. This works especially well if the new owner’s property is empty when the management agreement is signed. It offsets the cost of preparing the property for a new tenant along with the cost of finding a new tenant.

At the beginning of a new management agreement, you could also defer the cost of management fees until you find a new tenant to move into the unit. While this may appear to benefit the property owner initially, this approach may prove detrimental to both the owner and the property management company. If the unit is vacant, then the property management company fronts the cost for both preparing the unit and finding a new tenant. This means that the property owner starts off owing the property management company. If the property owner is unable to pay, the property management company will not only be out of the money spent, but may need to pay more to try and recoup the funds from the owner. Finding a tenant quickly is imperative if this approach is taken.

Each month that rent is collected, the management fee is deducted from the rental income along with other expenses.

Example: the property management company collects rent of $500 for the month of January. The negotiated management fee is 10%. The property management company receives 10%, or $50.00, from the rent collected.

Late Fees

Another potential income stream for the property management company is late fees. This is another negotiable item that can either be kept by the property management company or funneled to the owner. When negotiating, recommend to the property owner that your company keep the late fees since your company is the one putting forth the effort of actually collecting the rent. Most times, property owners won’t give this a second thought especially if the rent still gets paid and they receive their profits.

Mark-ups

The best way to describe the “mark-ups” is to say that for every check written on behalf of the property, the property owner pays your company. For example, if you pay for the labor and materials involved with replacing a broken window, the property owner reimburses the property management company for the repairs plus a mark-up. This is another income stream for your company and these mark-ups may be negotiable as well.

Example: the property management company pays the electric bill of $50.00 for a vacant unit. The mark-up is 5%. The property owner owes the property management company $50.00 plus the 5% mark-up, or $52.50.

Administration Fees

The cost for the property management company can also be passed on to the third party property owners. These costs presumably cover the wages of employees to perform tasks, such as filing, mailing, travelling to and from properties or court proceedings, and other overhead expenses. 

Administration fees are usually nominal amounts that do not typically make up a large portion of the fees charged to property owners.

Conclusion

This list is not exhaustive. However, these income sources are the foundation upon which your property management business will be built. Use them to maximize your company's profits and grow your property management business. 

6 comments:

  1. These costs presumably cover the wages of employees to perform tasks, such as filing, mailing, travelling to and from properties or court proceedings, and other overhead expenses.

    ReplyDelete
    Replies
    1. Yes they do. They're needed so the business can continue to provide their services to those who either don't have the time or don't want to manage their own properties. Thank you for your comment.

      Delete
  2. Quite an impressive post about Property Management Bookkeeping at http://.bookkeeping-course.org/. Finally I know how to Earn Income in Property Management, appealing post.

    ReplyDelete
    Replies
    1. Thank you for taking the time to read my post and for your kind words.

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