What is a profit and loss statement for a rental property, what needs to be included, and how it can be used by real estate investors?
A profit and loss statement summarizes your rental income, expenses, and net operating income over the specified time period. This is one of the most helpful reports that landlords can use. It helps investors stay on top of their finances by giving them an overview of their portfolio’s (or individual properties) financials.
A good profit and loss statement(P&L) is a key tool for identifying opportunities for further growth by increasing gross rental income and minimizing operating expenses.
Additionally, the net operating income that is reported on a quality profit and loss statement is used in several other essential real estate investing metrics including cap rate, operating expense ratio, and debt service coverage ratio.
Profit and loss statements can be generated at any time using software like Landlord Studio. Most commonly though, they are used on a monthly, year-to-date, and end-of-year basis for tax returns.
In this article, we take a closer look at what a profit and loss statement is, what needs to be included, and how it can be used by real estate investors.
A profit and loss statement for your rental property, as the name suggests, is used by landlords and property managers to track income and expenses and report on the profit (or losses) of their rentals. It reports the current financial state of the business over a specified period of time.
A good P&L report will highlight any places a property manager may have overspent, where losses may be occurring, and why profits aren’t as expected. By identifying these operational strengths and weaknesses, it can serve as a guide for identifying opportunities to maximize overall net operating income (NOI).
A rental property P&L will tell you three key things: the gross income, the overall operating expenses, and the net operating income (eg. total profit or loss year to date).
The gross income on your profit and loss statement is the total taxable income collected so far in this tax year. This will include the rent collected from your rentals as well as any additional revenue such as tenant application fees, pet rent, appliance rent, revenue from vending machines, car parking, and laundry rooms.
The operating expenses are the overall costs and expenses of owning and running a rental business. These are everyday operational costs such as maintenance, advertising, bank fees, management fees, etc. Different property types may have slightly different operating expenses. For example, a landlord of a multi-family property may pay utilities for communal areas, and for properties with large yards, landlords may need to pay gardening and landscaping costs.
Oftentimes the categorization of operating expenses will be modeled after Schedule E (Form 1040) from the IRS. Landlord Studio offers a specific Schedule E report alongside our Profit and Loss Summary and Income and Expense Statements to help make filing a Schedule E easier and more accurate.
The profit and loss statement for your rental property will also report your total net operating income (NOI). The net operating income is the total profit that the rentals have generated and is calculated by subtracting the total operating expenses from the gross income.
NOI can be used by real estate investors in several different financial calculations including cap rate and debt service coverage ratio. Your cap rate will tell you the current and potential return on your investment, while the debt service coverage ratio is used to determine the total debt that your portfolio can support.
Note: In order to calculate the cap rate and debt service coverage ratio, you will need to remove the depreciation, mortgage interest, and capital expenses. This can easily be done by adjusting the filters in Landlord Studio.
We have four key reports that can be used to report your total profit and loss with Landlord Studio, the Profit/Loss Summary, the Income Expense Statement, the Breakdown Report, and the Schedule E Report.
All Landlord Studio reports are customizable by income and expense categories, property, and date range. For example, you might want to exclude capital expenses and mortgage payments in order to calculate the NOI to be used in your cap rate formula.
This is a quick summary, broken down by property, which shows the total income and total expenses. This report doesn’t give you a breakdown by category like the others on this list but can be used for a quick overview of income and expenses on a property-by-property basis. This is especially useful if you have a lot of properties.
Our income and expense report gives users a complete breakdown of their portfolio income and expenses. The report is organized by property, with income and expenses organized by date, so you can see exactly what and when income came in and expenses were paid.
This report breaks down your income and expenses by property, separating income and expenses and splitting your expenses into their relevant categories. This makes it as easy as possible to understand what your biggest expenses are on a property-by-property basis to help you identify where you may be spending too much.
The Schedule E report is designed specifically for tax time to help you when filing your Schedule E. It splits your reportable expenses into the Schedule E categories so that at the end of the tax year, you can simply print off the Schedule E report and copy across the details.
Most investors run these reports routinely. This is because profit and loss statements are so useful, giving a snapshot of portfolio performance and taxable income.
Running a monthly P&L will help you track varying net income on a month-to-month basis. For example, you might find that in the winter months your maintenance costs go up. Knowing this, you can plan ahead and avoid getting caught out.
A year-to-date rental property profit and loss statement will show you how you are tracking for the year. Are you achieving the targets you set? Can you refinance to invest in additional properties? Do you need to cut costs? The year-to-date report shows the current profit and loss for the tax year up to the current date.
The year-end P&L reports the total property or portfolio income or loss for the calendar year and can be used to help prepare your tax returns.
Rental properties are one of the best ways to build long-term wealth. You can generate additional cash flow whilst building equity in an appreciating asset. However, in order to run a successful rental property, you need to know your numbers inside and out.
With a quality reporting functionality and regular profit and loss statements, you can not only identify potential areas to improve net income but also use this data to plan for the long term and approach lenders for additional growth opportunities.