A real estate balance sheet is one of the main financial reports that investors have access to. However, while many investors focus on metrics such as cash flow and net operating income, these two metrics only tell part of the story. The real estate balance sheet provides a high level view of property performance by reporting assets, liabilities, and owner equity all in the same place.
- A real estate balance sheet is a key report investors use to monitor the long-term financial health of a rental property.
- Key sections of a real estate balance sheet are assets, liabilities, and owner’s equity.
- Real estate balances sheets provide important information such as the amount of cash on hand and potential tax liability when a property is sold.
- Automating a balance sheet can provide a snapshot of the current property market value and owner’s equity at any given point in time.
What is a Real Estate Balance Sheet?
A real estate balance sheet reports how much a property is really worth by subtracting liabilities from asset value. There are three sections to a real estate balance sheet:
- Assets: Real estate, appliances used in a rental, cash in a checking or savings account, and other real estate investments such as shares in an LLC or fractional ownership of a single-family home.
- Liabilities: Mortgage debt, credit card balances, money owed to vendors, property taxes, and refundable security deposits from a tenant.
- Equity: Calculated by subtracting liabilities from assets.
Equity in real estate is often thought of as a property’s net worth by using a simple formula:
- Real Estate Assets – Real Estate Liabilities = Real Estate Equity or Net Worth.
Items on a Real Estate Balance Sheet
Now let’s take a look at the most common types of information included on a basic real estate balance sheet for a single-family rental home:
Accumulated Depreciation on a Balance Sheet
For this example, we’ll assume an investor purchased a single-family rental home three years ago for $120,000. The IRS allows residential investment real estate to be depreciated over 27.5 years, excluding the value of the land or lot.
If the value of the single-family home lot is $10,000, the annual depreciation expense on the rental property would be $4,000 per year:
- $120,000 home price – $10,000 lot value = $110,000 property value subject to depreciation.
- $110,000 / 27.5 years = $4,000 annual depreciation expense.
After three years, the accumulated depreciation would be $12,000. Accumulated real estate depreciation appears on the assets section of a balance sheet, as shown in the following example.
Example of a Real Estate Balance Sheet
|CapEx (capital expense) account||$3,500|
|Less: Accumulated depreciation||<$12,000>|
|Tenant security deposit (refundable)||$1,200|
|Credit card balance (business account)||$500|
Note that accumulated depreciation doesn’t actually affect the property value until the home is sold.
When a sale does take place, the depreciation expense taken by the investor to reduce taxable net income is recaptured by the IRS and taxed at an investor’s normal federal income tax rate, up to a maximum of 25%.
Any remaining capital gain is taxed at a rate of 0%, 15%, or 20% depending on an investor’s income level.
By keeping track of the accumulated depreciation of a rental property, it’s much easier to calculate the potential tax liability when the property is sold, and to determine how much money could be saved by conducting a 1031 tax deferred exchange.
Free Real Estate Balance Sheet Template
For real estate investors who prefer to use a spreadsheet and manually update the balance sheet, there are several places to find a real estate balance sheet template online:
- Examples.com offers free real estate balance sheet templates for a real estate portfolio.
- Microsoft Office has a balance sheet that is easy for real estate investors to customize and use.
- Rentals Z provides a printable rental property balance sheet in Microsoft Excel, plus other real estate templates and worksheets.
- Template.net offers seven real estate balance sheet templates in Excel and PDF formats.
- Wise has free real estate balance sheets for downloading in Excel and Google Sheets formats.
Benefits of Automating a Real Estate Balance Sheet
Even for investors who are just getting started with their first rental property, there are some big advantages to automating a real estate balance sheet instead of using a basic spreadsheet template.
For example, an automated real estate balance sheet can update the property value according to current market conditions to provide a more accurate picture of balance sheet assets.
According to Zillow, the typical value of a single-family home has increased by more than 25% in the last three years.
Instead of carrying the home on the balance sheet with a book value (original purchase price) of $120,000, an automated real estate balance sheet would show the home’s true market value as $150,000, along with a corresponding $30,000 increase in total asset value and owner’s equity:
|CapEx (capital expense) account||$3,500||$3,500|
|Less: Accumulated depreciation||<$12,000>||<$12,000>|
|Tenant security deposit (refundable)||$1,200||$1,200|
|Credit card balance (business account) $500||$500|
An automated balance sheet can also update other balance sheet asset and liability accounts, including bank and mortgage balances, and automatically calculate depreciation expense, to show the amount of owner’s equity in real time.
How to Automate a Real Estate Balance Sheet
Stessa recently introduced a new automated real estate balance sheet specifically designed for investors with single-family rental homes, small multifamily buildings, and short-term rental properties.
The new real estate balance sheet from Stessa is an essential accounting report for rental property owners. By automatically updating entries in real time, the real estate balance sheet provides a quick snapshot of:
- Assets and liabilities.
- Market values for all properties.
- Bank and escrow account balances.
- Outstanding loan amounts.
- Other key balance sheet details.
After signing up for a free Stessa account and entering property information and banking details, investors can access the Balance Sheet via the Transactions page, along with the Income Statement and Net Cash Flow reports.
Assets, Liabilities, and Equity
The Stessa Real Estate Balance Sheet focuses on current value instead of book value or depreciated basis to provide a true picture of an owner’s equity. The assets section of the balance sheet is updated in real time by pulling current market values from each property
Other asset items on the balance sheet such as current bank balances and outstanding mortgage balances are imported directly from connected financial accounts and balances from lenders and updated as changes occur.
Owner’s equity on the real estate balance sheet is automatically revised when asset and liability accounts are adjusted.
Another way of thinking about the equity balance is as the property’s net worth, or the liquidation value (before any sales or closing expenses are incurred) if an investor were to sell the property at that specific point in time.
Why Automating the Balance Sheet is Important
A real estate balance sheet that is automatically updated adds another dimension to the financial performance of a rental property.
While metrics like cash flow, cash on cash return, and cap rate are important when analyzing results and making projections, they don’t always provide a complete picture of the here and now.
For example, it’s possible for a property to be cash flow negative in any given month, due to a higher than anticipated vacancy rate or a one-time capital expenditure such as replacing the HVAC.
While the income statement and net cash flow report may show a loss, a real estate balance sheet that is constantly updated can put things into perspective by revealing that there is plenty of equity in the rental property.
The more often a real estate balance sheet is updated, the more useful the report is for providing deep insights into how well investments are performing on both a property and portfolio level.
Because the real estate balance sheet is a snapshot of current assets, liabilities, and owner’s equity, an investor can quickly answer questions about the property such as:
- How much cash is available today to make the mortgage payment due tomorrow?
- Is there enough money accrued in the CapEx account to replace worn-out carpeting when the current tenant moves out at the end of the month?
- If the property were sold this month, what are the projected taxes owed from depreciation recapture and capital gains?
- Is there enough implied equity in the property to do a cash-out refinance to raise funds for the down payment on another rental home?
It’s difficult to answer questions like these when a balance sheet is updated manually. By automating the real estate balance sheet, investors know exactly how the property stands at any given point in time.