Property Management Income and Expenses: Your Personal Handbook

Decoding your Financial Health: Profit and Loss Statement

You might think that a profit and loss statement is a financial report – but it’s a roadmap to understanding your company's financial health. This statement summarizes the revenues, costs and expenses incurred during a specific period, determining whether your properties are cash cows or money pits. While a chart of accounts is more detailed, P&L statement only includes money brought in and money spent. Therefore, the P&L statement typically includes:

1. Revenue: Total income from all sources, including rent and fees.
   
   Revenue = Pet Fees+Rent Commission + Maintenance Fees + Other Fees (Management fee, Eviction fee, Vacancy fee etc.)
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2. Expenses: All costs associated with managing properties, such as maintenance, payroll, and utilities.
   
   Expenses = Maintenance Costs + Payroll + Utilities +Insurance + Taxes + Miscellaneous Expenses
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3. Net Income: The difference between total revenue and total expenses, indicating the company’s profitability, or the grand total mentioned at the bottom of the statement (bottom line).
   
   Net Income = Revenue − Expenses

Regularly reviewing your P&L statement helps property managers identify how income can be increased, where expenses can be cut and to make informed financial decisions. It’s not just about crunching numbers—it’s about steering your business toward sustained success.

Property Management Income Dictionary  

Property management companies have multiple sources to generate income. For instance, if a tenant has a pet, they may be charged a pet fee. This fee not only contributes to the company’s revenue but also serves as a security measure, covering any potential damage the pet might cause to the property.  

Fees charged by property management companies can vary depending on the state or region. For example, pet fees, late payment fees, and lease renewal fees may differ based on local regulations and different state laws. These fees generate revenue, so knowing what can be charged in your area is essential for maximizing your income. Here’s a list of income sources:  

This list just scratches the surface of potential revenue streams for property managers. But the question is, which fee is likely to increase your net income?  

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Increasing Revenue of your Property Management Business: Fee and Service Charges

If you're a property manager looking to boost your revenue, you're not alone. Many in the industry are exploring additional fees and service charges to enhance their bottom line. The key is to offer value-added services that tenants and property owners find beneficial, while also ensuring that these services align with local regulations.

Here are some strategies and ideas that successful property management companies are using to generate additional income:

1. Resident Benefit Packages

Who pays for it:
‍Tenants.

What is it?

One of the most effective ways to increase revenue is by introducing a Resident Benefit Package (RBP). The Resident Benefit Package is a selection of services provided by property managers to the tenant. These bundle services are charged to the tenant in the monthly fee, offering convenience to tenants while adding income for your business. A RBP might include services such as:

• Regular HVAC filter delivery
• Identity protection services
• Credit reporting for on-time rent payments
• Renters' insurance

By providing these benefits, you not only enhance the tenant experience but also generate an ancillary income that boosts your profitability.

2. Administrative Fees

Who pays for it:
Property owners.

What is it?
Administrative fees are charged to property owners for handling tasks that exceed standard services. This could include processing new tenant paperwork, preparing lease agreements, or managing legal documents. These fees ensure that your additional time and resources are adequately compensated.

3. Pet Fees

Who pays for it:
‍Tenants.

What is it?
Pet fees are a common and effective way to generate extra income. These fees help cover potential damage or additional cleaning required due to pets. You can charge the tenant a one-time pet fee, a monthly pet rent, or a combination of both.

4. Lock/Key Fees

Who pays for it:
Tenants.

What is it?
Charging for lock changes or key replacements is a straightforward way to increase revenue. This service, often required by tenants, ensures property security while covering your costs.

5. Notice Fees

Who pays for it:
Tenants.

What is it?
Notice fees are charged to tenants who plan to move out. This fee helps cover the costs associated with preparing the property for the next tenant and finding a new renter.

6. Amenity Fees

Who pays for it:
Tenants.

What is it?
Amenity fees can be charged for access to property features such as gyms, pools, or laundry facilities. These fees help maintain the amenities and provide an additional revenue stream.

7. Miscellaneous Service Fees

Who pays for it:
Tenants. and Owners

What is it?
Offering extra services such as  cleaning, package handling, or storge can increase revenue. Tenants often value these conveniences and are willing to pay for them, giving your property management company a competitive edge.

To increase your revenue, focus on adding value to your tenants and property owners. Whether through a comprehensive Resident Benefit Package, or various administrative fees, there are plenty of ways to boost your bottom line. The key is to find the right balance between providing valuable services and ensuring profitability.

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Beware of these Expenses!

Yes, you now know how to generate your income, but the next crucial step is managing expenses. Running a property management company involves various expenses that need to be carefully managed to ensure profitability. According to the National Association of Residential Property Managers (NARPM), 59% of revenue is spent on labor costs. Therefore, monitoring expenses is crucial for effective financial management. Here’s a closer look at the common expenses you may encounter:

1. Overhead Costs/Expenses

Who do you make the payment to:
In general paid to whoever the service/item is bought from.

What is it?
Overhead costs are the general costs of operating your property management business, including office rent, utilities, and office supplies. These expenses are essential for maintaining day-to-day operations and ensuring your business runs smoothly.

3. Payroll and Contractor Fees

Who do you make the payment to:
Employees (for payroll) and external contractors (for specific tasks).

What is it?
Payroll includes the salaries, benefits, bonuses, overtime pay, and training and developmental costs paid to your property management company employees. Contractor fees are for external professionals hired for specific tasks, such as maintenance workers, cleaners, or administrative support. Managing these costs effectively is crucial for maintaining a profitable operation.

4. Insurance and Licensing  

Who do you make the payment to:
Insurance companies and licensing authorities.

What is it?
You always need a layer of protection for rainy days. Insurance costs protect your property management business from various risks, including property damage, liability claims, and employee-related issues. Although insurance typically accounts for only 1% of your revenue, it's a critical expense to monitor. Licensing requirements for property managers also vary by state and need to be maintained.

5. Service Fees

Who do you make the payment to:
Service providers, such as maintenance workers or utility management companies.

What is it?
These are fees paid to service providers for tasks like maintenance, repairs, or utility management. Service fees can vary depending on the scope of work and the terms of service agreements with vendors.

6. Membership Fees

Who do you make the payment to:
Professional organizations like the National Association of Residential Property Managers (NARPM) or the National Apartment Association (NAA).

What is it?
If you're part of professional organizations or networks, a membership fee is incurred. These fees are charged for joining property management associations, industry groups, or other relevant organizations that offer resources and networking opportunities.

7. Legal and Professional Fees

Who do you make the payment to:
Legal professionals, accountants, consultants, and sometimes bookkeepers.

What is it?
These include costs for legal services, such as drafting lease agreements, handling disputes, or managing evictions. Professional fees may also cover accounting, consulting, and other specialized services required for property management companies.

Once you've identified your expenses, managing them can be challenging. Whether you've been running your property management company for 10 years or less, it's common to encounter owners who are not financially prepared to cover large expenses. The key question is: how are property managers handling these significant costs on behalf of owners without impacting their own cash flow?

Managing Large Expenses in Property Management

As a property manager, one of the significant challenges is handling large capital expenditures (CapEx) like roof replacements, HVAC system upgrades, or major property turns. These expenses can severely impact cash flow, especially if property owners are not financially prepared. Here’s a look at how experienced property managers are tackling this issue:

• Educating Owners on Reserves: Many property managers emphasize the importance of maintaining a reserve fund. As a property manager, discuss with your new owner clients how they should keep savings. Frame this as ‘what professional investors do’ and ‘industry standards’ so they know it’s not just an opinion. This proactive approach ensures that owners are better prepared for unexpected expenses.
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• Fixed Reserve Amounts: Setting a fixed reserve amount from the rent collected is another strategy. This reserve can cover unexpected repairs, ensuring that the necessary funds are available without delaying maintenance or repairs.
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• Withholding Owner Funds: In cases where an owner fails to respond to necessary repair requests, some property managers have the right, through their management agreement, to withhold funds to facilitate the repairs. If no response is received within two weeks, they may even terminate the management agreement and assist tenants in relocating, ensuring compliance with habitability laws.
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• Third-Party Financing Options: Offering third-party financing such as property improvement loans or vendor financing for large repairs is a solution being considered by some managers. Property management companies might also explore other third-party financing options like energy-efficient mortgages, government-backed loans for sustainable upgrades, or partnerships with financial institutions to offer customized loan packages. This approach can ease the financial burden on property owners, allowing necessary repairs to proceed without delay.

Best Practices for Managing Income and Expenses

Lastly, a set of best practices followed by seasoned property managers will help you manage your property management income and expenses.  

1. Maintain Your Chart of Accounts: Keeping detailed records of income and expenses helps in tracking financial health and preparing accurate financial statements.
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2. Regularly Review Financial Reports: Monitoring income and expenses on a monthly basis allows for timely adjustments and proactive management of financial issues.
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3. Budget Carefully: Establishing a clear budget, set expectations for income and spending, and make sure to meet financial goals.
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4. Implement Preventive Maintenance: Regular maintenance can prevent costly repairs in the future, contributing to long-term savings.
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5. Utilize Property Management Software: Leveraging technology can streamline operations, improve record-keeping, and enhance financial reporting capabilities.
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6. Focus on Tenant Retention: Keeping tenants satisfied can lead to longer leases and reduced vacancy rates, positively impacting income stability.
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7. Plan for the Unexpected: Setting aside a reserve fund for emergencies can mitigate the impact of unexpected expenses on cash flow.

Whether it’s through diversifying income streams, educating property owners on the importance of reserves, or adopting best practices for financial management, the key is to stay proactive and informed. With the right approach, you can build a stable property management portfolio that benefits both you and your clients for years to come. Managing a property isn’t just about collecting rent and keeping tenants happy—it’s a delicate balance between generating income and managing expenses. Whether you’re a seasoned property manager or new to this, understanding the fundamentals of property management accounting is crucial to manage your company's income and expenses. In this blog, we’ll break down the dollars and cents of property management for building a successful, profitable portfolio.