One of the essential records in commercial real estate is the statement of operations, generally known as the "profit & loss" or "P&L" statement. All real estate investors should properly keep this record because it offers a comprehensive picture of a property's financial situation.
What Is a Property Statement of Operations?
A financial statement that assesses a property's operations and present financial position is a property statement of operations. When completing a property statement of operations, you can include information on a property's running costs, overall revenue, and operating profit to give a comprehensive picture of the property's performance and financial position.
An equation is also used in a property statement of operations to determine a property's net income by deducting expenses from revenue.
Why Is It Important for CRE Investors?
Since a property statement of operations displays a property's overall performance and the specifics that contribute to it, it can be beneficial for investors who wish to assess the performance of their property.
For instance, investors can examine a property's statement of operations to determine whether costs might exceed their budget if they want to determine why their property generates little revenue.
Most investors look into property statements of operations before investing in properties to ensure they will be successful, so having one that has been updated can be vital for property owners hoping to draw new investors.
What Should Be Included in a Property's Statement of Operation
The gross monthly income, total operating expenses, and net operating income are the three primary information included in a property's statement of operations.
Gross Rental Income includes: monthly rental income, storage, pet rent, appliance rent, laundry usage, application fees, parking, and late fees. Investors can better comprehend a property's many revenue streams and spot opportunities to boost income by itemizing gross income. Depending on the type of property, many rental income streams exist.
For instance, a multifamily landlord might pay master-metered services (such as water, sewer, trash, and gas) and then pass along a tenant's share of the cost as extra rent. Still, a single-family rental (SFR) tenant often pays directly for services.
Operating Expenses may fall into two categories on a rental property income statement: costs associated with maintaining the property, and owner costs associated with the rental property. Property maintenance costs include: advertising, cleaning, electric, gas, HOA dues, insurance, landscaping & snow removal, leasing commissions, legal & professional fees, licenses, mortgage interest, other interest (such as credit card), pest control, property management, property tax, rental tax, repairs & maintenance, trash, and water & sewer. Owner expenses may include: auto expense, continuing education, dues & subscriptions, office supplies, telephone, and travel expense.
Using NOI, financial indicators for rental properties, like cap rate and debt service coverage ratio (DSCR), can be calculated. A property's cap rate is determined by dividing NOI by the property's acquisition cost or value. Borrowers and lenders use the DSCR to calculate the maximum mortgage a given property's NOI can support.
When calculating NOI, the computation does not include mortgage interest, owner expenses, depreciation, and capital expenses. Since these costs can change, such as when an investor accelerates depreciation, they are not included in NOI.
Net Operating Income: the whole revenue of the asset is subtracted from all necessary operating costs to get the NOI or net operating income. Capital expenses are not included since they must be added to the property's cost basis, are subject to depreciation, and are not immediately deductible.
How Often Should You Review Your Property's Statement of Operations?
Your property's statement of operation should be reviewed by a qualified professional. Since the property's statement of operations reflects the property's performance, it is advisable to review it once a month. But for smaller properties, they can be reviewed quarterly but not later than that.
What Are Property Operating Expenses?
The recurrent costs of keeping a property in excellent shape are known as operating expenses. Only ongoing expenditures to maintain and keep the property in perfect condition should be included when an investor evaluates the operating expenses on a rental property or creates a pro forma of expected expenses.
Operating expenses may vary from one property to the next. Some of the most typical operating expenses include: payments made for a potential tenant's credit report, background check, rental history, and eviction report; advertising and marketing strategies (websites, "For Rent" signs, print and online ads, etc.); leasing costs (typically one month's rent for a new lease and half a month's rent for a renewal, if property management is hired); repairs and maintenance to keep a property in good, livable shape; landscaping and snow removal (a tenant fee in a single-family rental, but a landlord expense in a small multifamily complex); pest control; insurance premiums for homeowners and landlords; property taxes; homeowners' association dues; and professional service fees paid to a financial advisor, lawyer, or accountant.
Is a Statement of Operations the Same as an Income Statement?
A statement of operation and an income statement are just semantically distinct from one another. They are several names given to financial reports for properties that outline the main ways in which the property contributes to its net revenue.
The phrase "statement of operation" is derived from the income statement's operating income section, which is a significant factor in determining the property's net income. This section lists the fixed costs of carrying out the primary property management or maintenance tasks. These frequently consist of selling costs, administrative costs, and other costs associated with general operations.
Most businesses refer to this crucial financial statement as an "income statement" or "statement of income." It's because the report concludes with a total net income for the specified period.
Accountants consider the revenue and expenses for that specific period when accounting for the specifics in the income statements. The specifics (expenses, net sales), however, are not always required to be realized at the same time.
What Is a Property Income Statement?
A property income statement details a property's income and expenses over a specific period and illustrates if the investment is profitable during that period. To "assist taxpayers in avoiding a sweat at tax time," the Internal Revenue Service (IRS) has produced a fact sheet about renting out property. The primary forms of income that a rental property may generate include:
Advance Rent Payment: some landlords may collect a new tenant's first and last month's rent. Even if the rent won't be used as a tenant payment until the following year, the final month's rent is recorded as advance rent when it is received.
Normal Rent Payments: monthly rent, as well as any additional payments for pet or appliance rentals.
Compensation for Breaking a Lease: an "out clause" in a lease may permit a tenant to terminate the agreement earlier by paying a termination fee.
Tenant-funded Expenses: even if a landlord doesn't get paid, operating or repair and maintenance costs that are the landlord's obligation but covered by the renter are also considered rental income. For instance, the cost of landscaping that the landlord would regularly pay is reported as rental income if the landlord usually provides landscaping services but permits the tenant to complete the task in exchange for a lower rent.
Conclusion
Profitable properties are the best ones. A precise property statement of operations provides insights into areas where operating costs could be decreased and gross rental income increased to assist you in enhancing NOI. It also gives an instant overview of how profitable a property is.
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