The real estate income statement is a crucial financial report used by real estate investors to track the performance of their rental properties. It provides insights into whether the investment is generating the expected income and helps identify areas for improvement. In this article, we will explore the concept of a real estate income statement and discuss the possibility of automating this process for greater efficiency and accuracy.
What is a Real Estate Income Statement?
Also known as a profit and loss statement (P&L), a real estate income statement outlines the income and expenses of a property over a specific period. It shows whether the investment is profitable during that time and provides a breakdown of key financial metrics. The information typically included in a real estate income statement consists of:
- Gross rental income
- Additional income (such as pet rent, late fees, or roommate rent)
- Operating expenses (including property management fees, repairs, and landscaping)
- Insurance premiums
- Property tax payments
- Net operating income (NOI)
Image source: Saigon Intela
Types of Income Statements in Real Estate
There are several types of income statements used in real estate, each providing a unique perspective on the net operating income generated by a rental property:
Month
This type of income statement provides a snapshot of property income, expenses, and net operating income for a specific calendar month. It can also be customized for shorter reporting periods, such as a week or month-to-date.
Month-to-Month
A month-to-month income statement shows the performance of a rental property from one month to the next. It helps identify income and expense trends over a longer time period. For example, if late fee charges persist month after month, it may indicate the need to take action, such as eviction.
Year-to-Date
Also known as a YTD Income Statement, this report displays income, expenses, and net operating income from the beginning of the calendar year until the date the report was generated. It provides a comprehensive overview of the property's financial performance up to the selected date.
Year-End
The year-end real estate income statement summarizes the income, expenses, and net operating income for the entire calendar year. It is particularly useful for compiling tax returns and updating key financial metrics that rely on NOI, such as capitalization rate (cap rate) and debt service coverage ratio (DSCR).
Trailing 12 Months
A trailing 12-month income statement, also known as a T12 or TTM report, covers property income, expenses, and net operating income for the previous 12 months. It allows investors to track changes in NOI over a specific period, providing valuable insights into long-term performance.
Actual-to-Budget
This type of income statement compares actual income and expenses generated by the property to the anticipated amounts. It is often run quarterly or semi-annually to account for normal fluctuations in income and expenses.
Items on a Real Estate Income Statement
A real estate income statement is divided into three main sections, each containing specific income and expense items:
Gross Rental Income
- Monthly rental income
- Other income (e.g., pet rent, roommate rent, appliance rent, laundry, storage, parking, late fees, application fees)
Operating Expenses
-
Monthly operating expenses
- Advertising
- Cleaning
- Electric
- Gas
- HOA dues
- Insurance
- Landscaping & snow removal
- Leasing commissions
- Legal & professional fees
- Licenses
- Mortgage interest
- Other interest (e.g., credit card)
- Pest control
- Property management
- Property tax
- Rental tax
- Repairs & maintenance
- Trash
- Utilities
- Water & sewer
-
Owner expenses attributable to property management
- Auto expense
- Continuing education
- Dues & subscriptions
- Office supplies
- Telephone
- Travel expense
Net Operating Income
The Net Operating Income (NOI) is calculated by subtracting the total operating expenses and owner expenses from the gross rental income. It represents the profit generated by the property before taxes.
Example of a Real Estate Income Statement
Let's review an example of a basic real estate income statement for a single-family rental home. Suppose the property was purchased three years ago for $120,000, with a 25% down payment ($30,000), and generates a gross monthly rental income of $1,200. For simplicity, we will use a Year-End Income Statement.
Gross Rental Income:
- Rental income = $14,400
- Other income = $360 (pet rent)
- Total income = $14,760
Operating Expenses:
- Monthly operating expenses:
- Insurance = $800
- Landscaping & snow removal = $600
- Leasing commissions = $0 (tenant renewed the lease)
- Mortgage interest = $2,380
- Pest control = $100
- Property management = $1,440 (averages 8%-12% of gross rental income)
- Property tax = $950
- Repairs & maintenance = $1,200
- Total operating expenses = $7,470
Owner Expenses:
- Continuing education = $1,249 (Roofstock Academy Mastery Program)
- Travel expense = $2,500 (to visit out-of-state property)
- Total owner expenses = $3,749
Net Operating Income:
$14,760 Income - $7,470 Operating Expenses - $3,749 Owner Expenses = $3,541 Net Operating Income (NOI)It is important to note that when using a real estate income statement for actual rental property analysis, it is recommended to itemize income and expenses as much as possible. This allows for better identification of cost reduction opportunities while maintaining a high occupancy rate and property value.
NOI Calculations and Depreciation Expense
Net Operating Income (NOI) plays a key role in calculating the cap rate and debt service coverage ratio (DSCR) of a rental property. These metrics help investors assess the property's profitability and financing potential.
Cap Rate
The cap rate measures the return from a rental property without considering financing or owner expenses. These expenses are excluded because they can vary greatly among different investors. To calculate the cap rate, the NOI needs to be adjusted for mortgage interest expense and owner expenses:
$3,541 Original NOI + $2,380 mortgage interest + $3,749 owner expenses = $9,670 Adjusted NOIThe cap rate formula is then used to determine the return on investment:
- Cap Rate = NOI / Property Value
- $9,670 NOI / $120,000 Property Value = 8.1% Cap Rate
Debt Service Coverage Ratio (DSCR)
DSCR is used by lenders to evaluate whether a property generates enough net income to cover mortgage payments. A higher DSCR indicates a greater ability to handle unexpected income fluctuations or expense increases.
The DSCR is calculated by dividing the NOI by the annual debt service:
DSCR = NOI / Annual Debt Service
$9,670 NOI / $4,500 Annual Debt Service = 2.15 DSCRMost lenders look for a minimum DSCR of 1.25 to 1.35. In this example, the DSCR of the rental property exceeds the typical lender's requirement.
Depreciation Expense
Investors can benefit from the depreciation expense allowed by the IRS for residential properties used for investment purposes. Depreciation compensates investors for the property's gradual wear and tear, reducing taxable net income.
The following steps outline how to determine pre-tax net operating income after accounting for depreciation expense:
- Calculate depreciation expense: Assuming the lot value of the $120,000 property is $10,000, the annual depreciation expense would be $4,000 ($110,000 property value minus lot value divided by 27.5 years).
- Use the original NOI: Before adjusting the NOI for cap rate and DSCR calculations, the original NOI was $3,541.
- Calculate taxable net income: Subtract the depreciation expense of $4,000 from the NOI of $3,541 to determine the taxable net income, which is $0 ($3,541 NOI - $4,000 depreciation expense = -$459).
In this case, even though the property generates a positive NOI of $3,541, the investor would pay no taxes due to the depreciation expense tax benefit.
How to Automate Income and Expense Tracking
Tracking income and expenses manually through spreadsheets can be time-consuming and prone to errors. Automating the process can enhance efficiency and accuracy. Stessa offers a solution for automatic real estate income and expense tracking, enabling rental property owners to identify potential issues and compare actual results to budgets.
Image source: Saigon Intela
By signing up for a free account with Stessa, investors can add their investment properties and link relevant business bank, credit card, and mortgage accounts. Stessa automatically categorizes many property expenses and allows owners to classify the remaining expenses through a searchable drop-down menu.
Once all income and expense transactions are properly categorized, investors can generate real estate income statements using Stessa's Transactions page. Income statements can be customized to cover specific months, year-to-date, the entire calendar year, or any desired date range. Investors with multiple properties can generate income statements for individual properties or consolidate them at the portfolio level.
Stessa's transaction categories align closely with the IRS categories for tax reporting, simplifying the process for investors. At the end of the year, users can export tax-ready financials to their accountants or access the Stessa Tax Center for a personalized Stessa Tax Package.
Final Thoughts on This Topic
The real estate income statement, along with other reports such as balance sheets and net cash flow statements, allows investors to monitor the financial performance of their rental properties. By regularly reviewing these reports, investors gain a deeper understanding of each property's profitability and potential returns on future investments.
Automating income and expense tracking with tools like Stessa provides real-time insights and opportunities that may have otherwise been overlooked. By leveraging technology, investors can streamline their financial reporting processes and make informed decisions to optimize their real estate investments.
Note: All content, including images, has been derived from the original article.
