How to Read & Understand a Real Estate Income Statement

Investing in real estate is highly recommended by financial experts, given the underlying value it possesses. However, finding the right real estate to invest in can be quite challenging. It is one of the key factors used to monitor the performance of the properties.  

When it comes to investing in real assets, most of us are concerned with how the interiors and the surroundings look. However, one of the most important things that you should evaluate is the real estate income statement. 

What is a Real Estate Income Statement?

The real estate income statement is one of the most important financial reports used by real estate investors to analyse and assess the merit of holding a real estate asset.

It helps owners figure out the amount of income a real estate property is generating and how it is doing so. In addition, it lets you evaluate important metrics such as income, expenses, net operating income etc., from real estate investing. These days there are automated income statements generated by real estate companies to help users make wise decisions as these automated reports are error-free and authentic.

Types of Income Statements in Real Estate

An income statement for real estate can be treated as a profit and loss statement for the property. Different companies use different methods to prepare financial statements (in real estate). Some of the most commonly used income statements in real estate are as follows. 

Year-End 

This is the most common P&L statement that depicts the income, expenses, and profit and loss for each calendar year. It makes everything transparent and allows internal users to make the relevant changes. 

Year-to-Date 

A year-to-date statement will show metrics such as income, expense, profit, and loss from 1^st January of that year up until the previous month (depending on when it has been requested).

Suppose you requested a year-to-date statement on 7^th July. You will get the statement from 1^st January till 30^th June of that year. 

Trailing 12 Months 

The trailing 12 months statement calculates the income, expenses, profit or loss for the last 12 months from the date it is requested on. The real estate finance for the last year can be easily tracked using this statement. 

Month-over-Month 

The month-over-month statement is used to depict information regarding income and expenses at the end of each month. It is useful for tracking monthly progress. 

Reviewing Real Estate Income Statements

Reviewing the real estate investment statement is important to understand and evaluate the earnings from a given real asset. It can help you guide your future investments better.

Reviewing your real estate income statements entails individually evaluating the contents of the income statement that include metrics like income, expenses, net income,  the rental value of the property, etc.

If you are looking to invest in a property that could generate a good passive income, you must take the components of the real estate profit and loss statement into account. Reviewing these real estate Income statements is a good way to understand the potential of the investments.

Items on a Real Estate Income Statement

The real estate income statement is a profit and loss statement that is exclusively created for that asset. It will contain all elements of a regular profit and loss statement. However, it will be about the real asset in question.

The structure of this statement includes income, total income, expenses, total expenses and net income. 

• The income mainly has two components, interest income and rental income. Occasionally the late charges collected on account of rent are also added herein
• The expense section can include expenses like cleaning, maintenance, insurance, depreciation, utilities, license, property tax, repairs, etc. This commercial property income statement serves as the best expense management tool for companies.
• After deducting the total expense from the total income, the net income from a real estate investment is calculated in the P&L statement

Example:

Suppose that your real estate property generates USD 5000 from rent and USD 500 from interest income. Your total income will be equal to INR 5500.

Now, let’s assume that you have spent USD 1000 on repairs and maintenance and USD 800 on utilities. Your net income here will be USD 3700. 

Conclusion

This quick guide was to understand what a real estate financial statement entails and the aspects you should evaluate before investing in real assets. It is always better to upgrade and adapt to the changes. Similarly, such rental property income statements must be made using automated software as this reduces errors and helps to keep the reports updated. It provides the scope for real estate firms to identify and rectify the problems and correct them. And also makes it easier for the users to understand the performance of the firms. It also aids the real estate income tax process as the report is an essential financial document. 

About Us

OHI is a fifteen-year-old real estate services company working with 50+ commercial and residential real estate developers, funds and property management companies across USA. Our deep expertise in real estate accounting, financial analysis, lease administration and asset management has helped clients cut associated costs by 40-50%. We currently provide these services to a portfolio of 75000 units across clients.