Trust accounts are a valuable tool that make compliance as a property manager easier.
Having said that, when it comes to property management trust accounting, you’re really getting into the weeds.
There are tons of potential:
- Compliance issues
- Legal issues
- And state laws to watch out for.
And all of these things could land you in hot water.
Still, when properly set up, your tenant’s funds are safe and sound and you’re protected against judgements and other potential legal issues.
That’s why, in this guide, we’ll be detailing:
- How trust accounts work in property management
- Why you should use one
- And potential issues to watch for
For those new to using a trust account, let’s start with how they work.
How trust accounts work in property management
A trust account is simply a separate account you use as a property manager to manage property-related accounting.
The purpose of a trust account in property management is pretty straightforward:
In property management, a trust account is used to keep tenant rent payments and security deposits safe and separate from business operations activity.
Using a trust account is critical as a property manager to make sure that your client’s funds (the property owner) stay separate from your business accounting.
Why use a property management trust account?
Trust accounts are required by law in many states.
That aside, you want a trust account to keep both of your accounting domains separate and organized.
As a property manager, you need to simultaneously manage two separate accounting spaces:
- Your business accounting
- And each property’s accounting
Mixing things like your monthly office rent, payroll, and client payments in with the same account you use to collect rent payments and security deposits is a big no-no.
That’s mainly because the beneficiaries are different.
When it comes to your business activity, you’re the beneficiary.
When it comes to the activity of the properties you’re managing, the owner of the property is the beneficiary.
Put those two accounts together and you’ve got chaos.
Keep them separate and you can see everything clearly, helping you run proper reports and keeping your accounting clean for tax time.
Plus, it will keep you out of trouble.
Beyond this, though, a property management trust account allows you to keep client rent payments, security deposits, and other payments safe and secure.
3 Potential issues with property management trust accounting
While using a trust account for property management comes with several benefits, there are potential pitfalls to watch for.
Those come by way of:
- Co-mingling funds
- And state laws
Let’s break them down to understand more about how to avoid each issue:
When it comes to accounting for a property management trust account, you’ll want to protect yourself from audits by keeping records of everything.
That can include:
- Lease copies
- Bank statements
- Security deposit refunds
- Deposit slips
- Check copies
- Vendor invoices
- Copies of accounting reports issued to owners
Make it a habit of keeping a copy of each of these items– and anything else you think is important related to the account’s activity.
Sounds daunting if you’re not already doing it, but it’s not so bad when you get into the habit of making a second copy of everything for yourself and simply storing it somewhere.
2. Co-mingling funds
Easily one of the trickiest aspects of managing a trust account for property management is avoiding co-mingling of funds.
Specifically, this refers to a variety of situations where property/owner funds might mix with property manager funds.
Depending on your state laws, a few examples of co-mingling can include:
- Depositing funds from the trust account into a personal or business account
- Depositing personal of business funds into the trust account
- You leave your property management fees in the trust account for an extended period of time (check your local laws on the exact time period)
- Rent or security deposit funds within the trust account are used to pay your operating expenses
It’s worth repeating: every state is different, so you’ll need to check your state’s specific laws to know what is and isn’t allowed.
However, the above are general examples of co-mingling that are widely against state law.
3. State laws
The main thing to watch out for here is what your local laws say about how many trust accounts you can have.
In some states, you’re allowed to set up two different trust accounts:
- An “operating” trust account, designed to take care of operating expenses
- And another for tenant security deposits
This can be ideal, as it allows you to organize things even further with security deposits off in their own separate account.
However, it’s important to know your state laws as some states don’t allow more than one trust account for property management.
The last major thing to watch for is a simple and straightforward tip, but one which if not followed can easily land you in hot water.
In most states, you’re required to deposit rental funds into the trust account within 24-48 hours.
If you’re working with traditional checks, this can be a big pain.
It can even be difficult to do reliably with an online payment provider such as PayPal as payments don’t always go through within 24 hours and can be held without notice.
Fortunately, a better way to collect rent now exists in property management software.
With a tool like DoorLoop, you can collect rent automatically each month on time and have it immediately deposited into whatever account you choose:
No manual work, no hassle.
Not to mention, the full suite of amazing accounting tools you get to go along with it.
Get your accounts in order
Accounting is rarely fun (unless you’re the rare breed), but it’s a necessary part of any sound business venture.
By getting your accounts in order and making sure you’re using a trust account (or accounts), and using them the right way, you’ll save yourself a ton of potential headache and hassle.
And don’t forget to check with your state and local laws to be clear on what exactly you need to do to be compliant.