Q: Do property managers make mortgage payments for clients?

When are property management companies required to make a mortgage payment on behalf of a landlord client? After they have received the rent payment from the renter? Will this affect my taxes at all?

– Lexington, South Carolina

That depends on the contractual relationship you have with the property management company. With questions of this type, the governing document is almost always the contract.

State law usually governs what the property manager can do with deposits and reserves under its control, but is normally silent on ‘who pays what when.’ That’s normally something the landlord and the property manager negotiate for themselves.

If you are having your property manager forward mortgage payments to the lender on your behalf, that suggests you have a pretty broad scope of engagement with the property manager.

Most landlords I know would prefer to have more direct control of mortgage payments. Once in a while I see landlords who prefer to put even mortgage payments on autopilot, though, and as long as you’re providing adequate compensation for the extra level of responsibility (and potential liability), there will be lots of property managers willing to do that for you.

Take a look at the section of your agreement with your property manager dealing with the ‘reserve account.’ Generally, most property managers will want you to put up some ‘contingency cash’ in the form of reserves. This is ‘fast-track money’ that the property manager can access quickly to deal with emergency repairs, unforeseen circumstances (and of course the foreseen ones!).

If you ask your property manager to make mortgage payments on your behalf, your contract will probably require you to ensure the reserve account is adequately funded. I don’t know any property managers who would knowingly set themselves up with an obligation to pay a mortgage even if they can’t collect the rent money. Rent collection risk is  part of the business – which is why you should normally let your property manager handle tenant screening and selection. However, they don’t normally put themselves in the position of losing their management fee because of a problem tenant and simultaneously having to pay a mortgage payment out of pocket.

If the funds to pay the mortgage payment aren’t in the reserve account, as the landlord, it sounds like you’d better move funds there so the property management company can make the payment, or make the payment yourself.

The best way to do business, for both the landlord and the manager, is to fund the reserve account generously, so that there is enough there to fund the mortgage payment, association dues, taxes, insurance and anything else that has to be paid, even if the rent is late.

Property managers are set up to manage property. They aren’t set up to be lenders – and if you’re expecting them to make your mortgage payment for you out of pocket, you’re turning them into a creditor, not a partner, and putting them in a tough position.

Tax Consequences? 

You mentioned the possible tax consequences, but they should be minor. If your real estate operations are on the accrual accounting system (rather than the cash system), you realize expenses when you are contractually obligated to pay them, and not when you actually write the check.

So if there’s a delay in making a mortgage payment because you and your property manager are still trying to figure out who’s going to pay it at the end of the calendar year, the deduction still goes on the prior year’s tax return, not the later year. And whoever writes the check, it’s still tax deductible as a business expense either way, provided it’s rental/ investment property.

Note: Different rules apply if the property was used partly for personal use and partly as an investment/rental property during the year. Those rules are beyond the scope of this column.