Trust accounting for vacation rental managers (or property managers in general) (“PM”) can be confusing. Add in the selection, set-up & use of VRM booking and accounting software and it can become all out dizzying! While the precise set-up, specific accounting rules & reporting requirements will be different for each company, this article is intended to provide a framework for VRM trust accounting and introduce you to some important considerations as you grow your business.
Key Challenges With Trust Accounting
Trust accounting has unique features that make it difficult compared to the bookkeeping needed for the average business:
- Don’t Commingle Funds – Best practices suggest using separate bank accounts for property owner funds vs. property manager funds. Managing multiple accounts only puts roadblocks in front of cash flow, though. Proper accounting often involves time-consuming, manual data entries and extra levels of oversight. And if those aren’t properly applied, it risks causing serious cash flow issues.
- Preserving Fiduciary Responsibility – As the party tasked with collecting rents and returning security deposits, the vacation rental manager or management company has a fiduciary responsibility to renters and owners. Meeting that responsibility requires high levels of transparency and accountability that only become harder to preserve as the business grows.
- Complying With State Laws – Every state has different rules for trust accounting. Failure to comply with these laws can cause a business expensive headaches. Trying to manage rental incomes from multiple states can be similarly frustrating. Keep in mind that even when trust accounting isn’t required by law, it’s always the best approach to handling vacation rental accounting.
- Know Your Cash Position – Perhaps the most important reason to use sound trust accounting concepts is so you have a sound understanding of your company’s financial position and performance. By co-mingling funds and not tracking advance deposits, management companies can quickly get a false sense of security of their cash position, as much of the cash in their bank isn’t theirs. This makes projecting and managing cash during seasonal downturns or times like the early months of the COVID-19 pandemic especially hard.
None of these challenges are insurmountable, but solving them long-term requires the right trust accounting tools.
One bank account or two?
There really is not much of an option here. Two bank accounts (at least) are needed to appropriately administer trust accounting. One of the most basic requirements of trust accounting as required by law, is that there be no commingling of company funds and property owner funds. While trust accounting is not required in every state for short-term rental property managers, trust accounting and separate bank accounts is the best way to track owners’ and PM’s funds. The first account is typically an operating account, which holds funds that belong to the PM. The second account is an escrow account that holds rental & security deposits and rental revenues owed to the owners not yet paid out.
Should I take expenses out of the escrow account?
Under no circumstances should expenses that are the responsibility of the PM be paid out of the escrow account. Rental and property related expenses that are the responsibility of the property owners could be paid out of the escrow account, but this can create issues if the property owner does not have enough funds in the escrow account to cover the expense. If most or all rental related and property expenses are the responsibility of owners, using the escrow account can be considered. If responsibility varies greatly based on type of expense and agreement with owner, the best practice is to use the PM operating account and bill back the expenses to the respective owner at the end of each month.
What accounting software should I use?
There’s dozens of accounting software options out there, but three options that work the best for for most property managers are Xero, QuickBooks Online, and Sage Intacct. A big shortcoming of both Xero & QBO are that they are one entity & one ledger systems. While it can be done, trust accounting for property owners and accounting for the PM’s books in the same instance of QBO or Xero is very difficult. If you have specific questions about selecting accounting software and configuring it for vacation rentals, we would be more than happy to provide you with our recommendations.