Trust Accounting for Vacation Rental Managers

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.

Key consideration - Should you use the operating account or escrow account to pay for property and rental related expenses?

Under no circumstances should expenses that are the responsibility of the PM be paid out of the escrow account. Paying 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 respectable owner at the end of each month.

Should I use a Vacation Rental Management app?

Vacation rental management apps offer many advantages, including:

1. Streamlined booking experience for your renters
2. Automatic data transfer and booking into your calendar from multiple online booking sites
3. Fast and easy payment processing
4. Most offer some sort of trust accounting or general financial reporting features
5. Owner statements/portals and EFT transfer for owner payments
6. Marketing tools & apps
7. Most offer property management scheduling (housekeeping, maintenance, etc.)

One big shortcoming of VRM apps is that they don’t offer the bank/credit card account feeds and even if they integrate with an accounting software, such as QuickBooks Online, they don’t pull in owner expenses automatically. This creates the manual entry of expenses in the VRM app for complete owner statements, which is usually a duplicate entry because expenses have already been recorded in the accounting system if being used concurrently.

Key consideration - Can I just use a VRM app or should I also use an accounting software?

Small VRM’s (usually 5 or fewer properties) may be able to get away with only using a VRM app, but its not recommended. A shortcoming of VRM apps that offer accounting functionality is they are clunky at best and reporting and functionality is poor. Best practice is to use VRM apps for the booking, property and rental management, and tracking owner statements functionality in conjunction with an accounting software.

What accounting software should I use?

There’s A LOT of accounting softwares out there, but generally there’s three good options for most PM’s, 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. I walk through the suggested set-up of your accounting software in more detail below, but if using QBO or Xero, my recommended setup includes keeping two sets of books, one for the PM and one for property owners.

QuickBooks Online:

Pros:

• Very well known software with easy access to advisors familiar with the software, including CPAs and tax professionals
• Ease of use of software: With general working knowledge of accounting, use of QBO is fairly straightforward
• Many time saving apps that easily integrate, including several VRM apps
• Automatic bank feeds helps with easy recording of transactions and reconciliation of bank & credit card accounts

Cons:

• Reporting in QBO can be clunky and not very customizable
• While generally the system is easy to use, there are quirks. It is easy to delete information with no audit trail and knowing how to work the software does take some training.
• QBO is meant to be a fairly straight forward accounting software with limited configuration options; however, there are certain setup considerations and configurations necessary to properly account for the short-term rental business. Getting these settings correct based both on the VRM trust accounting model and your specific business needs takes a certain level of expertise and working knowledge of accounting systems.
• As mentioned above, QBO is meant to be a single entity & single ledger system. Because of this, best practice is to account for the PM and owner’s ledgers in two different instances of QBO. This requires some level of duplicate entry when billing back expenses paid on the owners’ behalf and billing of property management fees/commissions.

Xero:

Most of the pros & cons of QBO are the same for Xero. Below highlights the biggest differences:

• Xero is a newer software that is generally easier to use with better customer service
• More robust and easier custom financial reporting
• Easy upload of transactions, which is not a function of QBO except with the use of third-party apps. This becomes handy when transferring data from VRM booking apps.
• Still offers easy integration with many time saving apps, such as Hubdoc, Bill.com, Expensify and others to make bill pay, invoice & receipt data entry and credit card transactions a breeze.

Sage Intacct:

Pros:

• Robust multi-entity & multi ledger financial management solution making accounting for both the PM and trust accounting for owners very easy in the same system.
• Several different dimensions (known as classes in QBO) to tag and track transactions makes customizing financial reporting, automating owner statements, reporting per booking/guest stay & reporting and data analysis robust, yet quick and easy
• Custom financial reporting and dashboards
• Similar easy integration with many time saving apps
• Open API, allowing for custom integration of VRM apps for streamlined and automated accounting of bookings and recognition of rental revenue after guest stays
• Statistical accounts (i.e. headcount, guest stays, nights stayed, etc.) allowing for robust data and KPI creation and tracking
• Easy template uploads allows for easy transfer of data from VRM/booking softwares to the back-end accounting system

Cons:

• More complex setup requires expertise from a Sage Intacct Partner to ensure the system is setup correctly
• While highly ranked for its ease of use, likely too robust for a non-trained accounting professional
• While incredibly affordable as a robust financial management solution, the cost is likely out of reach for most PM’s with less than $10M per year in revenue.

Key consideration - Because Ximplifi is a preferred accountant partner with Sage Intacct, we are able to give access to this robust software to our VRM clients as part of our ongoing accounting services.

If you are ready to focus more time on growing your PM business by handing off accounting to Ximplifi and get access to better financial reporting, analysis and advisory, we look forward to helping!

How do I setup my accounting software?!

As most of you reading this will likely be setting up your system on QuickBooks Online, that is the system I will focus on below. Sage Intacct would only be setup with a certified specialist and Xero has a very similar setup to QBO. Note that this is certainly NOT the only way to setup your accounting software for trust accounting of property rentals, but is generally my recommended setup based on industry knowledge and experience.

First, below are the key setup configurations:

1. Two instances of QBO (or Xero): I’ll touch on a way to account for both owners & the PM in the same set of books, but it’s not what I recommend as best practice.
2. Operating Cash Account - Setup and accounted for in PM books
3. Escrow Cash Account - Setup and accounted for in the Owners’ books
4. Owner Payment/Draw Account - This account will be setup as an equity account to track payments to owners
5. Owners - Set-up as customers, both in the PM books & Owners
6. Renters - Set-up as customers. In long-term renter environments renters can be setup as sub-customers of the owner; however, this creates issues in short-term rental environments when you have repeat renters that rent out multiple homes with multiple owners.
7. Classes - Use class to track location in both the PM books and Owners’ books. Ensure that you allow the tracking “by line” instead of by invoice or bill. This comes in handy if you get bills that have expenses for multiple properties on the same bill and why I use “class” instead of “location” in QBO to track by location.Also, if you manage multiple homes for the same owner, having a “top class” that represents owners and “sub-class” for the property locations becomes very helpful. I also recommend turning on the feature in QBO that requires or at minimum warns when a class is not being used. This better ensures that income/expense is always tracked by owner/property. Note that in Xero, classes are referred to as “tracking categories”. Xero has two tracking categories and each can be assigned by line in invoices, bills, JE’s, etc. The tracking categories cannot have sub-categories so one tracking category would need to represent owners and one the properties.

8. Billable expenses - You will want to make sure that this tracking feature is turned on in QBO. It is an automatic feature in Xero. Note that this feature would only be used in the PM books for expenses billable back to the owner. If expenses that are the responsibility of the owner will be paid out of the escrow account in the Owners’ books, the expense will simply just need to be recorded in the correct account and assigned to appropriate class/tracking category (i.e. property & owner).

Trust accounting - how the transactions flow.

You will need a general understanding of accounting in order to properly account and track both your owners’ and your own PM company’s books. But hopefully this will give you a general understanding of the flow.

Rental & security deposits accompanying bookings, which usually occur in advance of the actual guest stay, should be recorded as rental deposits and deposited in the escrow account. With some online booking sites, payments for the rental are not received until after the guest departs. If using a VRM app, the tracking of these bookings is very automated and helpful. Because no money is received, generally there is no transaction to record; however, either creating a future dated estimate or invoice in your accounting software on the date of the booking makes accounting for the receipt of the money after the departure much easier. I also recommend creating the future dated estimate or invoice even when a deposit is received (in conjunction with recording a deposit) to make the recognition of revenue, sales tax, etc. automatic after the date of the guest departure.

After the guest stay and usually at the end of the month, rental management commissions will need to be calculated and recorded. A VRM app becomes very useful in tracking and calculating the rental management fees owed per rental. These fees should be recorded as invoices to the owners in the PM books and recorded as bills in the

Owners books. Using the upload feature in Xero is very helpful to batch create these invoices and bills. You can use an app like “Transaction Pro” to perform a similar upload in QBO.

Expenses paid on behalf of the owner will depend on whether you decided to pay for those expenses out of the Owners’ books (escrow account) or your PM operating account. If you paid via your PM operating account, you will want to make sure these expenses are marked as billable when first recorded. Upon the creation of the rental management fee invoices, you can simply add the billable expenses to that invoice and subsequently record as a bill on the Owners’ books. The downfall of this process is the duplicate entry on the PM & Owners’ books.

Every month, after rental revenue has been recognized, owners’ expenses and rental management fees recorded, it’s time to process transfers out of the escrow account.

The PM will transfer the rental management fees owed to itself from the escrow account and rental revenue less expenses and rental management fees should be transferred to the owners.

There are still other considerations, such as returning security deposits, paying sales taxes, and whether you require a retainer balance for future property expenses, but hopefully this provides an outline to follow to properly account in a trust accounting environment.

Key consideration - How to account for PM & Owners’ books in the same instance of QBO?

As mentioned, I don’t believe this is best practice; however, if you decided to go this route there’s several changes to the accounting software setup and accounting you will need to make:

• Owner payable account should be created in the balance sheet. I recommend creating a top level account in QBO, with sub-accounts “Owner payable - rental revenue received”, “Owner payable - owner expenses paid”, “Owner payable - rental management fees,” & “Owner payable - owner payouts”.
• As rental revenue is recognized, it should be reversed out of rental deposits and into the “Owner payable - rental revenue received” account. Similar with owner expenses.
• As bills are received or expenses are paid, they should be recorded in the “Owner payable - owner expenses paid” account.
• Rental management fees will need to recorded as journal entries, with credits to rental management fee income and debits to the “Owner payable - rental management fees” account.
• Payouts to owners should then be recorded in the “Owner payable - owner payouts” account
• The balance of the Owner Payable accounts combined should always represent the amount owed the owners.
• This is not very conducive to automating the creation of owner statements without the use of a VRM app; however, expenses paid on behalf of the owner will need to be manually recorded in the VRM app to ensure the owner statement is correct.