Property Management Accounting: One or multiple real estate trust accounts?

acountingA question that we – as a property management firm – are constantly asked by prospective new clients is “How do you reconcile the trust account against all the checks and bills that come in and out of your office each month? How can we be sure that our money is being properly accounted for?”

To us, the answer seems very simple:  each new client is set up with two new trust accounts once they sign a property management agreement:  An Operating and a Reserve account.  Security deposit monies that are collected from residents at move in are deposited into the Reserve account and not touched until that resident moves out again.  Monies that are collected as rent are deposited into the Operating Account and used to pay bills, vendors, owner distributions, etc.  At the end of each month, each account is examined and reconciled.  True, this adds a bit more work for our book keepers, but the reconciliations at the end of each month end up being very precise.

In California it is legal keep every client’s rental and deposit monies in one single trust account – but to me that seems like an accounting nightmare.  One account would save on bank fees and back end set up time, but that seem like a small price for being able to show our clients a bank statement at the end of the month with their specific account and accounting info.  If we employed the single-trust fund method, our clients would never – in my understanding – be able to see such an account statement due to the fact that  funds from 100 other properties would also be represented in this account.

I would like to know other landlords thoughts on this – Are we going to too much trouble with this approach?  Does one massive real estate trust account work?

-Trevor

  • Most property managers I know use a combined trust account; particularly, if they’re managing single family homes or other small properties. Every property management accounting platform allows you to print reports showing a single property’s activity, rather than a consolidated report (which you’ll need for bank reconciliation.)
    In Nevada, security deposits must be kept separately from the owners’ operating funds. So, in our state, the property managers have two trust accounts – one for all owners’ money, and one for all tenant security deposits.
    As to bank fees, most banks are happy to negotiate the fee away. With a large combined trust account, the liquid $$$ in there is enough incentive for the banks to forgive fees.
    Hope this is helpful… 🙂

    • David Garay

      Hi Trevor,

      Your practice for setting up “Real Estate Trust Account” seems very simple and is in-line with CA DRE. However, the banks we are engaging with are much more complicated. Can you recommend a bank or two that will setup accounts according to your post above? Many thanks!

  • Judy – very true – all property management software does output a single property’s activity… but how does a company with one trust account respond when a client asks to see the actual bank statement? For example, I have few clients who require a scan of the bank statement every month so that they can see the “real” amounts in the trust account. How would a property manager handle this client request if there was only one trust account?

    • Lee

      Lee, I have a question? When accounts are set up for clients is it set up in the firms name or does the account need to be in the clients name and the firm handles it, i.e clients SS# to set up?

      • Hi Lee,

        In California, we set up a specialty account called a “Real Estate Trust Account” with our bank. The Trust Account is created under our firm’s brokerage license and is “in trust of” our client’s name and SS# (or Tax ID # if it the property is owned by a corporation). This type of account allows our property management company to deposit checks and pay bills on behalf of the property and, at the same time, ensuring that the our Owners can securely access banking information.

        If you would like to discuss further about the requirements to set up this type of account, please feel free to contact me at our corporate office: (888) 773-7573

        Have a prosperous week,
        -Trevor

        • David Garay

          Hi Trevor,

          Your practice for setting up “Real Estate Trust Account” seems very
          simple and is in-line with CA DRE. However, the banks we are engaging
          with are much more complicated. Can you recommend a bank or two that
          will setup accounts according to your post above? Many thanks!

          • Hi David,

            We have used Wells Fargo with great success when it comes to setting up Real Estate Trust Accounts. Alternately, we have engaged UnionBank (due to a specific request from a client) and they were able to get the accounts created properly – but not without hang-ups and hassles.

            Please let me know if I can help with anything else. -Trevor

  • I would first read the contract your management company has with the owner. When you have one bank account for security deposit, you should have sub account for each tenant with the bank. May be you can request that the bank send the owner a statement each month.
    If you have seperate bank account for each tenant, it is going to be very time consuming process buy may be a solution for your company. Again there is a contract in place, and a trust between you and the owner.

  • Gita – I agree: separate bank accounts for each client is a more time consuming process for our bookkeeping department, however I feel that the level of service and transparency makes up for it. When our clients need to see an official bank statement, with only their investment’s transactions we are able to produce it very easily. In my view, this enhances the manager/owner trust factor in that we have a third party institution (eg The Bank) backing up our accounting and reconciliations. -Trevor

  • Such deposits may be used only for certain specified purposes, and if not used, the deposit must be promptly refunded to the tenant, so the manager must be careful. And if these trust accounts are used improperly, the company could suffer penalties such as license suspension or revocation.

  • Such deposits may be used only for certain specified purposes, and if not used, the deposit must be promptly refunded to the tenant, so the manager must be careful. And if these trust accounts are used improperly, the company could suffer penalties such as license suspension or revocation…..

  • I have about 40 Different accounts set up with Bank Of America for each Owner of our Company. We recently migrated from TenantPro Accounting System to Appfolio and was told that it would be best to have only one or two accounts. But I like you have never been comfortable with that idea. Admittly, it is costly but when mistakes happen,(and they will), it is so easy to back tract in a specific account to find out where and how the problem occurred.

    • Hi Sub Management Solutions,
      I definitely agree with your approach and our property management firm continues to keep each property’s trust account separate (even if it is the same owner or investment group). We go as far as to offer our clients online account access to the financial institution as well as online access to all the book keeping records associated with their investments. I hear that AppFolio is a good management program – best of luck with the new transition! Let us know how the software works out for you! -Trevor

  • conleycreekpm

    So I’m new to the property management industry as far as owning PM company. We’ve managed our own properties for years and are now starting our own company and am so excited to find your blog. So currently I’ve learned it is best to have a client trust account set up for EACH property for ease in accounting purposes and of course a separate Security Deposit account is necessary per licensing laws. But I am still unclear as to who the tenants make checks out to. I know I have an operations account as well for the company, so do they make them to my company name and then they get transferred/deposited into the individual client trust account?
    Thanks for your help.

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