Property management can be a complicated business, especially when dealing with single-family rentals. One of the key components of this business in Texas, or anywhere for that matter, is understanding how owner distributions work when using a management company. These distributions are crucial for property owners, as they represent the return on their investment after all expenses are paid.
The Role of Management Companies
In Texas, management companies play a pivotal role in maintaining the financial health of single-family rentals. Their tasks include collecting rent from tenants, paying all expenses related to the property, and, importantly, distributing the balance to the property owner each month. Given the scale of operations—often managing hundreds or thousands of properties—these companies typically rely on advanced property management software for efficiency. Our company, for instance, opts for Appfolio, a leading platform in the industry.
Monthly Accounting Statements
Every month, alongside the actual monetary distribution, an accounting statement is provided to the owner. This document is essentially a general ledger detailing all cash inflows and outflows related to the property. In compliance with Texas Real Estate Commission (TREC) regulations, this statement must be provided to all owners monthly, provided there have been transactions associated with their property.
Distribution Timeline
Most management companies, ours included, schedule owner distributions around the 10th of each month. This timeline is strategic:
- Rent Collection (1st – 5th of the month): The standard Texas Association of Realtors Lease (TAR) usually stipulates rent due on the first, with late payments accruing between the 3rd and 5th.
- Late Fee Assessment (around the 5th): Late fees are applied to tenants who haven’t paid by the specified late date.
- Management and Vendor Payments (around the 7th): This is when the management company pays itself the monthly management fee and settles any vendor accounts for services rendered.
- Security Deposit Refunds (around the 7th): Any refunds due to previous tenants are processed.
- Owner Distributions (around the 10th): Finally, electronic payments are processed and sent to property owners.
Potential Anomalies and Complexities
However, this timeline isn’t set in stone. Several factors can disrupt this schedule:
- Tenant rent payments may be delayed or not made at all.
- Banking holidays or weekends might push distributions.
- Occasionally, tenant funds may return as Non-Sufficient Funds (NSF).
Importance of Reserve Funds
Given that many owners have mortgages on their rental properties, which typically become late after the 15th, timely distributions are crucial. We recommend owners maintain a reserve of one to two months of mortgage payments to handle any distribution interruptions due to late or non-payment by tenants.
Trust Account Management
Under TREC rules, all property funds must be managed through a Trust account. However, from an owner’s perspective, this account operates more like an Operating Account for accounting and reporting purposes. This Trust account requires almost daily reconciliation through a three-point system, ensuring that the bank balance matches the book balance and that all funds are allocated to a specific property. Crucially, no owner balance can remain negative for an extended period, as this would imply the use of another owner’s funds to offset the negative balance.
The Need for Expertise
Navigating owner distributions and accounting is complex. The typical property manager, with basic brokerage and real estate experience, might find themselves under qualified to handle the volume and intricacy of trust accounting and owner distributions. Therefore, it’s essential for a management company to have team members with a background in finance or accounting to manage complex situations effectively.
In conclusion, owner distributions when using a management company involve a well-orchestrated series of steps, compliance with regulatory requirements, and the need for financial acumen. Understanding this process is vital for property owners to ensure their investments are managed effectively and profitably.