Property Management Accounting: Best Practices For Accurate Financial Management

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Today s guest is Mark Kappelman Mark is a CFA and CPA Co-Founder of RealEstateAccounting Co dedicated to helping property owners achieve financial independence by streamlining their real estate accounting processes Join Sam and Mark in today s episode ————————————————————– Mark Cappleman s Background 00 00 41 The Niche of REA 00 02 40 Common Mistakes in Property Management 00 06 10 Bookkeepers vs Accountants 00 07 59 Best Practices for Property Management Accounting 00 10 14 Expanding Services to Property Management 00 13 27 Mark s background and how REA started 00 16 08 REA fills a need in the real estate market 00 17 11 How to get in touch with REA 00 17 39 ————————————————————– Connect with Mark Linkedin https www linkedin com in markkappelman Web https www realestateaccounting co utm source reaco Connect with Sam I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns Facebook https www facebook com HowtoscaleCRE LinkedIn https www linkedin com in samwilsonhowtoscalecre Email me sam brickeninvestmentgroup com SUBSCRIBE and LEAVE A RATING Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts https podcasts apple com us podcast how-to-scale-commercial-real-estate id1539979234 Spotify https open spotify com show 4m0NWYzSvznEIjRBFtCgEL si e10d8e039b99475f ————————————————————– Want to read the full show notes of the episode Check it out below Mark Kappelman 00 00 00 – What our pitch always is to clients which is Hey look we re we re cheaper than hire full-time And most people don t realize cuz we re 10 99 contractors And what most people don t realize is is you think you need a full-time accountant but you probably do not need a full-time account Mm You know we always say you need accounting outcomes not an accountant You need your bank recs done on time you need your AP done on time and you need the reporting out to your investors uh and clients on time Intro 00 00 28 – Welcome to the How to Scale Commercial Real Estate Show Whether you are an active or passive investor we ll teach you how to scale your real estate investing business into something big Sam Wilson 00 00 41 – Mark Cappleman is a cfa a CPA and co-founder of realestate accounting co They re dedicated to helping property owners achieve financial independence by streamlining their real estate accounting processes Mark welcome to the show Mark Kappelman 00 00 54 – Sam Thanks for having me Pleasure ab Sam Wilson 00 00 56 – Absolutely The pleasure s mine Mark there are three questions I ask every guest who comes in the show in 90 seconds or less Can you tell me where did you start Where are you now and how did you get there Mark Kappelman 00 01 05 – Let s see I started by you know going to college and wasn t sure I wanted to be in business Wasn t sure which major had a couple uncles said Hey accounting s the language of business uh you gotta understand how to read a p and l a balance sheet So if you don t know what you wanna do do accounting and you can come out with a cpa Uh so it s pretty good advice I think in hindsight I did that worked in the big four Um you know read a book called Rich Dad Poor Dad which is cliche for a lot of people but it com there s a line in the book that says you know why not Why climb the corporate ladder when you can own the ladder And I was just it totally threw me off I was climbing the corporate ladder at that point I wanted to get into real estate Mark Kappelman 00 01 45 – Um my wife and I bought a single family home as a rental Then we started flipping houses you know I left the big four cuz I couldn t do both And then we started rehabbing property So now we re rehabbing single families We started rehabbing multi-families and then the process of doing that real estate was my side hustle I outsourced my own accounting two different times and it just came back poor The communication was bad They didn t understand you know n o I and what to capitalize and what to run through r and m And so then we started looking around to say Hey look who s just for focused on real estate accounting Couldn t find anybody And that was where we really got the idea for r e a Sam Wilson 00 02 23 – And you re absolutely right you re absolutely right There there there is a lot of of misunderstanding in that space You guys decided to form r e a but yet you focus even more I think niche inside the accounting side of things than even what the traditional listener might think of when they think of real estate accounting What is that Mark Kappelman 00 02 40 – Yeah yeah So really our niche is property management Um when we started the business the thesis was we re gonna help fix and flippers just cuz that s kind of what I was at the time I was rehabbing one house at a time you know we had draws we needed help with and we thought that was the target customer We actually got in market we realized the much bigger opportunity and the bigger problems to solve were for property managers bank reconciliations accounts payable and the quality of financial reporting I think any of your listeners that work with third party property management companies they re probably getting a wide variety of the quality of financial information And we get those financials are they tax ready or not Uh and that s where we realized hey look they re you just can t afford many of these property managers The margins are so so thin they can t afford to hire high quality accounting talent But if you work with a group like r e a you may not need a full-time person you might need a partial person And we can bring that really high-end touch um at a fraction of the cost maybe a fraction of the hours and deliver a better result Sam Wilson 00 03 48 – When how much property did you have or were you managing of your own when you decided to launch r e a Mark Kappelman 00 03 56 – Yeah I think today we re at 40 units I think when we got the idea so we launched four or five years ago We were probably at like 30 units Um you know I m managing 30 units in Chicago today Um but yeah right in that like 30 to 40 range Sam Wilson 00 04 12 – And what was it along the the process of managing and owning your own properties that gave you this insight into the kind of disconnect between property managers and accounting Mark Kappelman 00 04 24 – I mean I just we outsourced our books twice Mm And I was like you know at the time I was accounting was a side hustle right I m still working as an account and now I ve left the big four I m working for this tech startup so I m doing accounting all day and then nights and weekends I m trying to acquire multifamily and do deals And then I also have to do the accounting for that right And I m like I just can t do this And you know I read the book I think is EMyth mm-hmm that s like look focus on re generation outsource all the admin So I m like accounting is admin to me in this real estate business my daytime job but it s still admin over here So I outsourced it and it just came back super bad And and and real estate you know you can go into accounting but like when people say are you into accounting Well there s a ton of different niches to that And real estate s just one of them There s very unique accounting things Not everybody understands a closing statement a refi There s all sorts of things that you have to do So we just realized there was a lack of specialists um and we went for it Sam Wilson 00 05 27 – Absolutely And and yeah to your point I mean I ve often wondered you look at the property management companies and it s like the margins are thin Yeah There s It s like how how how how is this profitable I mean obviously it s profitable at scale but it has to be at scale and then in order to do it at scale just means there s that many more moving parts So clearly I m you re preaching to the choir here and telling you that you re solving a problem But maybe let s talk a little bit about some of the mistakes or some of the problems that ownership groups have when working with their property management getting reports on time Like what are some what are some things you see uh maybe the maybe the breakdown in communication or some other kind of uh common mistakes that that occur in those in those relationships Mark Kappelman 00 06 10 – Yeah I think you know time and time again of what we see is so o one small step back 70 of our clients are owner operators meaning they re probably a syndicator or a wealthy individual but more often a syndicator that is going out and buying the deal but then also managing it Okay Mm-hmm Okay Um and so the the reason I bring that up and it it it it relates to your question is that you know whether you re that person or you re a wealthy syndicator that s now hiring a third party property manager that s probably the more common scenario Sure People don t want a property manager they want to do the deals hire a local property manager right The thing about lo in that case is you need to report on full financials back to your investors You know when you go out and raise money and do a deal you say here s what year 1 2 3 4 and five are gonna look like Mark Kappelman 00 07 05 – And uh here s my proforma and and and my opinion the good syndicators are reporting out either monthly or quarterly on here s actuals versus proforma The reality is is the books that your property managers keeping need to match you know don t need the the basis needs to match in that Like r and m needs to be properly booked to repairs and maintenance and not CapEx CapEx needs to be booked properly Um the right things need to be above and below the line on noi The property manager needs to add the budget into their system The same budget that you gave that you gave your investors otherwise now you re doing a bunch of manual manipulation uh on your end and when your PM should be doing that So I think you know it is just so often the accountants I m gonna say take a step back So often the people working at property management companies are bookkeepers Mark Kappelman 00 07 59 – They re not actually accountants And we always say like you need an accountant not a bookkeeper A bookkeeper knows how to add a bill An accountant knows what general ledger account to use whether it s r and m or campex I keep using that example Uh a bookkeeper knows to pay the bills an accountant needs to accrue for real estate taxes and accrue for insurance and book G P R and all these things that you know we take for granted as syndicators Um but I would lay I would I would wager to guess that nine out of 10 bookkeepers at property accounting firms have no idea what you re talking about when you start talking about those things Maybe the really big shops they do but even then uh the skills vary I Sam Wilson 00 08 41 – Yeah I would I I couldn t agree with that more And and again uh you know well kept books speak to my heart Like I love I love you know I m a passive investor uh as well as an active investor in a lot of deals around the country And there s nothing better than the monthly email that comes and it has just just a lovely spreadsheet or maybe just a PDF of like Hey here s the accounting for the month Or maybe it s probably two months back but whatever it is it s it s just it s great to see that s like oh this is well done They know what Mark Kappelman 00 09 12 – They re doing Yeah And and what I would and what I would say cuz I cuz I I do the same passive investing now too which is what I would say is in your expectation if I m a syndicator I want to just be able to share the stock report reports from that property manager I don t wanna have to be doing a bunch of manual manipulation on my side And that s how you really know if you ve got a quality accounting team at the property management is can you just take the p and l the T 12 the rent roll and all the related reports and just send that out You know maybe you add some color as to here s what s going on with the leasing You re always gonna do that as the lead gp but if you re having to do a bunch of manual manipulation and change the numbers I think you ve identified a problem Sam Wilson 00 09 56 – Right right Undoubtedly Let s talk a little bit about the interview side of things You know as we re as we re out here looking at property manager property managers as we are interviewing them what what things should we we be taking into account uh from the accounting perspective Mark Kappelman 00 10 14 – Yeah I mean questions I I I think about it from the best practices part from my side which is hey you know easy basic stuff If we re collecting serial security deposits do you have a separate bank account that you keep those all in that you reconcile every single month Um so other things like hey are you guys doing balance sheet reconciliations every month Which means you know now we re getting into the weeds but are you ticking and tying AR and AP and prepaids and all these things that you know we do as an accounting team I would want to know that the the accounting team s doing that Um how quickly are gonna expect financials how many accountants are working on my um on my books Uh these are the types of things I would be asking Uh if I if I was to GP a deal now and outsource it to a property magic company I would obviously be really in the weeds uh on that But those are the types of questions I d be asking Sam Wilson 00 11 12 – Yeah those are those are those are great questions And and it s and again it goes back to that how detailed are they gonna be but again going back to the property managers their margins are oftentimes thin And so I guess how do you how do you navigate that when you say okay maybe they re a great property manager but maybe their accounting is gonna be slow or I don t know I mean is there is there a way to kind of sort between they re read between the lines on that and say Hey this is a decent decent property management company I can help em get their accounting done Or is it just hey you re you re we re we re we re out of business cuz this just isn t gonna work Mark Kappelman 00 11 49 – I think you know ultimately I always tell people you re probably not gonna fire your property management company cuz it s bad accounting Maybe you will But if their leasing s great if the management s great if retention s great um you know you re gonna be able to kind of look over some of those things Um now in terms of what our pitch always is to clients which is Hey look we re we re cheaper than hire full-time And most people don t realize cuz we re 10 99 contractors And what most people don t realize is is you think you need a full-time accountant but you probably do not need a full-time accountant Hmm You know we always say you need accounting outcomes not an accountant You need your bank recs done on time you need your AP done on time and you need the reporting out to your investors uh and clients on time And if that means you re hiring us for 80 hours or 40 hours versus 160 hour full-time person um you know I always challenge people on people on that is you can hire us fractionally get a higher quality and deliver on the results that your clients are expecting Sam Wilson 00 12 55 – Right No that s that s that s so true So absolutely true I love that So you you ve got a a a deep history here you know starting out in as an accountant then you ve gone to fix and flip you still presently own roughly 40 units You re a limited partner in deals across the country You are running the um your r e a what s what is that short for I m sorry I m Mark Kappelman 00 13 16 – Real estate accountant Sam Wilson 00 13 18 – Uh I m an idiot real estate accountant Uh you re you re running that company Like what s what what s next for you What s what s something on your horizon that you re really excited about Mark Kappelman 00 13 27 – Yeah you know what what what we re what we re really excited about right now is that as we ve gone deeper in the accounting business um we had clients coming to us to say Hey look you guys are really good at accounting but do you guys do any help with leasing Do you do any help with maintenance coordination Do you answer owner questions Uh and what we realized is is look there s a there s a really big opportunity here for assistant property management and I can tell you why exactly as you earlier in the call you said how many units do you manage Uh I ve managed 30 units in Chicago and it was just me and a maintenance guy for the longest time But then when I looked at what I was doing leasing season was absolutely killing me Uh hosting the listings somebody coordinating all the showings somebody coordinated with the current tenant when they can they come over he exchanged um um filter change outs Mark Kappelman 00 14 24 – I mean I could go on and on and on and on and on And so what we did is in my own property management I hired a virtual property management cuz the vast majority of things can be done virtually Yeah And yes you need an onsite maintenance guy So we heard this from multiple clients Can you help with non accounting Can you help with non accounting I knew I had the same issue in my business Hired the person kind of proved it out And now um we re offering that as a service to clients to kind of go deeper than just accounting Uh we we we really see r e a is conveniently r e a but we really see the whole umbrella as kind of real estate administration So the kind of vision would be payroll insurance You can go really deep as to areas you can help Mark Kappelman 00 15 06 – We started with accounting now we re focused on property management and kind of assisting clients uh in that journey There s so many we have so many clients We have some really big clients big teams But a lot of our clients are entrepreneurs that are doing everything that are just starting outsource pieces They ve outsourced the accounting to us and now they re like wait I can go spend time growing my business and you guys can do leasing coordination and you can do maintenance coordination And we say yeah that s what we do And we think we have a unique competitive advantage because we re already doing it at our own business Right You know we re not just accountants we are actually people that have done deals flipped houses built new construction managed property syndicated deals so we can kind of uh 70 of our business is with people that own and operate just because you know we ve kind of been in their shoes maybe on a smaller scale Sam Wilson 00 15 55 – Sure Sure No I think that I think that s great What are some keys maybe as you look to scale that that help you take on or tack on these new lines of business without getting distracted from your core business Mark Kappelman 00 16 08 – Yeah I think that s the you know you ve heard all these stories at least I have of people always wanna go to the next shiny object And like that s why quite literally from the last five years we ve been hyper-focused on accounting That s all we ve done We ve thought about going into tax We realize don t have a competitive advantage there We d be better off just referring it to tax c p a firms uh that specialize in that This has just you know we ve talked about going into different parts of real estate hotels or you know different sub niches This just kind of like I displayed came naturally in that we had the problem in our own business Clients are starting to ask for it and just thought look we should I mean we understand this business and we already have a pool of clients that we can go pitch this into Um so it was just kind of natural So I think we have stayed really disciplined Um and you know I love focusing on a niche cuz it s really the same issues over and over and over and over and over again And you get pretty darn good at addressing them Sam Wilson 00 17 11 – Absolutely Mark this has been insightful I certainly appreciate you taking the time to come on the show today I mean you guys are filling a void you already know that Or filling a need filling a need filling a need I don t know which way you say that but you re serving your clients well for something that obviously Yeah That you re aware of that we need here uh in in the real estate especially the commercial real estate space So thank you for taking this head on and uh bringing what you do to the market This is certainly awesome If our listeners wanna get in touch with you and learn more about you what is the best way to do that Mark Kappelman 00 17 39 – Yeah best places go to our website www rrea co not com but do co um that s the best place There s a you know a link to book a meeting with us You can find me on LinkedIn I m active ish there Uh but the website s the best spot Sam Wilson 00 17 58 – Fantastic Re a ceo we ll make sure we put that there in the show notes Mark certainly appreciate you coming on today Thank you so much for your time Mark Kappelman 00 18 05 – Yeah thanks Sam Appreciate it Sam Wilson 00 18 07 – Hey thanks for listening to the How to Scale Commercial Real Estate podcast If you can do me a favor and subscribe and leave us a review on Apple Podcasts Spotify Google Podcasts whatever platform it is you use to listen If you can do that for us that would be a fantastic help to the show It helps us both attract new listeners as well as rank higher on those directories So appreciate you listening Thanks so much and hope to catch you on the next episode Click here to visit this podcast episode