There are many instances when you will have to have your Owners infuse their account with funds. This situation occurs for a number of reasons: the property has a monthly negative cash flow; you have just had to do some major repair (replacing the furnace or air conditioner); a major remodel after a long-term Tenant vacated, or something as simple but expensive as paying property taxes.
First of all, let me say that we strongly recommend that you maintain a buffer amount (minimum $500.00) in each of your Owners’ accounts. This will give you the flexibility to take care of small repairs without having to have your Owner send you a check, and depending how much of a positive cash flow the property may have, you can replenish the buffer fairly easily for that.
Holding on to the idea that Owners (as is the case with all of us) do not like surprises about money . . . unless we have won the lottery! Now, emergencies happen and usually, they are difficult if not impossible to anticipate. But I am speaking here about the expenses that the Owner is going to have on his property that we can anticipate: long-term Tenant moving out, real estate taxes (they’re always due on the same date – year after year) or a special assessment from the HOA. When we can anticipate these expenses we need to be proactive in estimating how much they will be and when our Owners will need to send funds. This will accomplish a couple of things:
1.) It gives your Owner a warm fuzzy feeling to know that you are watching his back and keeping him from having unpleasant surprises and 2.) It gives you the funds from which to pay the expenses. Otherwise you could find yourself in the unenviable position of having done $10,000 worth of work on an Owner’s property and when you call him to get the funds you learn he is in Zimbabwe for 2 months . . . or worse yet, he thought that the expenses were going to be less and he doesn’t want to pay the $10,000 and now wants to negotiate the amount with you . . . YIKES!
Dunning Letters and E-Mails to Owners for Funds
We have had very good luck with sending e-mails out (to our Owners that do e-mail) when we need funds. You may think this is very elementary but before you tell your Owner that you need more funds, be sure to do your homework. What do I mean by that? You don’t want to send your Owner an e-mail telling him that you need $1,500.00 to pay for the new water heater if his property is running $100.00 negative cash flow each month and he has no reserve buffer left. If you don’t say something about the negative cash flow and the status of his account, you will just be asking for more money again next month. This makes the Owner feel like you are not on top of your game (which you aren’t) and causes both of you more work in the long run.
Again, be proactive with your Owners and anticipate what their cash position looks like. Act like it is your money and how you would want to be treated. If I had the above scenario, I would tell the Owner that I needed $1,500.00 for the water heater (as we discussed previously) and the negative cash flow on the property has run through his reserves. We would like an additional $500.00 to replenish his reserve account and $600.00 to cover the next six months of negative cash flow at $100.00 per month.
Maintaining Security Deposit Liability Integrity:
When a Tenant pays you a security deposit on a property, that is a liability that you will maintain in the Owner’s account. The purpose of the security deposit is so that you have funds (security) in the event the Tenant fails to pay the rent or leaves the property damaged when he or she moves out.
When there is a cash need for repairs or whatever else on an Owner’s property, there is the temptation of the Owner to see that cash in their account and want to use it to pay those expenses. If you allow them to use it, this is a very, very slippery slope to allow yourself to step onto. For a couple of reasons: 1.) unless you document it well and in writing, after a few years, our memories fail us and our Owners are no different, they will typically not remember using that security deposit to pay operating expenses from and 2.) as property managers we are required by law to notify the Tenants that we are no longer holding their security deposit; that the Owner is, and give them the Owner’s contact information.
Now we, as property managers, are the Owner’s agent and the security deposit does belong to the Owner, we are just holding it for them. If the Owner insists on using this money, we recommend that you go about this in the following way:
- Write a check to the Owner for the full amount of the security deposit and mail it to him with a letter explaining the transaction and a copy of the letter you are sending the Tenant.
- At the same time send a letter to your Tenants advising them who is now holding their security deposit.
It is important that you not go back and forth with this transaction; giving the deposit to the Owner, putting it back in the account, back to the Owner, etc. First of all, this will breed a lot of insecurity and concern on the part of your Tenant and secondly, it is a lot of work and liability for you! If you are going to do this, we advise that you tell your Owner (put it in your management agreement if you want) that you will make one transfer of the security deposit and that is it. Something to think about, given enough time and aggravation it won’t be long before your State’s Department of Real Estate will be conducting an audit of your trust account. That could be right up there on the fun scale along with root canals and IRS audits!
There are a lot of very good fully integrated property management software programs on the market today. When I say fully integrated, I use the term loosely as these various programs are integrated to varying degrees. In general terms, there are programs on the market now that will take care of the accounting for your Owners; interface with your word processor so you can write letters to Owners or Tenants and it will file them with the property; and will keep a rent log for single or multiple properties.
This is the teaser. We will be discussing software programs and their pros and cons in the next chapter.
I hope you enjoyed our various topics today. Next we will start some discussion on “systems” used by property managers . . . don’t miss out!
If this information has been helpful to you, visit our website for more resources to help you profitably manage your rental properties!
Thanks for reading!
Pat & Kris Larkin