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Managing property finances goes beyond just collecting rent and paying bills. If you want to be successful in property management, you need to approach it with a strategic eye and be vigilant about your spending. You also need to establish a solid foundation in terms of a budget, processes, and back-up plans.
With that in mind – especially if you’re new to property management – here is a guide that can help you get on the right track when it comes to managing your finances:
Set a clear budget for your property management activities.
Knowing how much you have to work with is crucial in any financial endeavor – and property management is no different. You need to set a budget for yourself so that you know exactly how much you can spend on things like repairs, marketing, and other necessary expenses. For example, you might consider hiring a specialist in property management and finance, like Lincoln Frost.
Without this, you may end the year at a loss or worse, in debt. Consider these questions to help you create a realistic budget:
- How much rental income do you expect to receive each month?
- What are your estimated expenses? This should include things like mortgage payments, property taxes, insurance, and utilities.
- What are your goals for the property? Are you hoping to make a profit or simply break even?
Once you have a budget in place, it’s also a good idea to add a buffer of 10-20% to cover unexpected costs like emergency repairs.
Optimize systems and processes for managing your property management finances.
Minimize human error and inefficiencies by putting systems and processes in place for managing your finances.
In fact, you’ll find that the property management companies in Colorado Springs invest a great deal of time and resources into perfecting their financial management processes. This could include using accounting software, setting up electronic payments, and automating repetitive but critical tasks as much as possible.
Track your progress regularly.
Don’t wait until the end of the fiscal year to see how you’re doing – check in on your progress regularly.
This makes it easier to keep tabs on financial red flags. For instance, are you spending too much on repairs? Do you need to increase rent to keep up with inflation? By tracking your progress, you can catch these issues before they become major problems.
You don’t need to check your records everyday, but do establish a regular schedule for tracking your progress.
Keep extremely detailed records.
You never know when you might need to go back and reference a specific transaction. That’s why it’s important to record anything and everything related to your property finances. This includes receipts, invoices, contracts, and more. Even conversations with vendors or tenants should be noted down or have copies uploaded to a secure storage file.
If you ever find yourself in a legal dispute, having detailed records will be invaluable. This also makes it easier to stay on top of your finances and catch any errors or discrepancies.
Never transact verbally.
In relation to record-keeping, always get everything in writing. For example, never sign off on a repair without first getting a detailed estimate in writing. The same goes for rent increases, late fees, and other financial dealings with tenants.
Getting everything in writing protects you from legal issues and misunderstandings down the road. It also creates a culture of accountability and professionalism which is always good for business.
Be proactive about collections.
Ideally, you should never have to chase tenants for rent. But it happens – and when it does, you need to be proactive about collections. The sooner you can collect rent, the better.
This means setting up a system for reminding tenants when rent is due and following up promptly if it’s not received on time. You might also want to consider using a collections service to help you recoup any late or unpaid rent.
Keep an emergency fund.
Although you may plan meticulously, there are always costs which pop up unexpectedly. When that happens, you don’t want to have to dip into your savings or take out a loan to cover a repair bill or replacement appliance.
An emergency fund gives you the financial flexibility to handle whatever comes your way. As a rule of thumb, you should have 3-6 months’ worth of property management expenses set aside in an easily accessible account.
Invest in insurance.
Even the biggest emergency fund may not be enough to rebuild after a natural calamity, or you may find yourself facing a lawsuit from a tenant. In these cases, property management insurance can be a lifesaver.
Make sure your property is properly insured against all potential risks. This could include liability insurance, fire insurance, flood insurance, and more.
The bottom line is that managing your property finances is crucial to the success of your business. It also protects both you and your tenants, along with any other stakeholder in your investment. By following these tips, you can ensure that your property finances are always in good shape.