Why is it that some rental properties generate solid income month after month, while others barely break even? While there are a number of likely possibilities, the answer may be access to information.
A rental property income statement is a report real estate investors use to accurately keep track of rental income and identify opportunities for growing income and reducing expenses to increase profits.
Keep reading to learn more about the benefits of using a rental property income statement, and download a free template that you can begin using right away.
- A rental property income statement summarizes income, expenses, net operating income, and pretax net income over specific time periods.
- A good rental property income statement helps investors identify ways to increase rental income and reduce expenses.
- Rental property income statements are used to keep track of taxable net operating income before and after deducting depreciation expenses.
What is a rental property income statement?
A rental property income statement is a report that shows income and expenses by month, along with a running year-to-date total and year-end summary. Also known as a profit and loss statement (P&L), the income statement reports whether a rental property turns a profit or generates a loss.
Types of rental property income on a statement
The Internal Revenue Service (IRS) has created a fact sheet about renting out residential property to “help taxpayers avoid a sweat at tax time.” Here are the main types of income a rental property may generate:
Normal rent payments
Monthly rent and additional rent like pet fees or appliance rental.
Advance rent payment
Some landlords collect the first and last month of rent from a new tenant. The last month of rent is reported as advance rent when it is received, even if the rent will not be applied as a tenant payment until the following year(s).
Payments for canceling a lease
A lease may include an “out clause” allowing a tenant to leave before the lease ending date in exchange for paying a cancellation fee.
Expenses paid by tenant
Operating or repair and maintenance expenses that are the landlord’s responsibility but paid by the tenant are also treated as rental income, even though a landlord doesn’t actually receive payment. For example, if a landlord normally provides landscaping services but allows the tenant to do the work in exchange for reduced rent, the landscaping expense that the landlord would typically pay is reported as rental income.
Other types of rental property income
Nonrecurring payments from a tenant are also reported as rental income, such as application fees or late fees.
Is a tenant security deposit rental income?
A tenant security deposit is generally not considered rental income if the deposit is meant to be refunded to the tenant when they vacate the property.
When a refundable security deposit is received from a tenant, the deposit is recorded as a liability on the real estate balance sheet because the deposit is owed to the tenant.
However, there are a couple of exceptions to this rule:
- If the lease states that the tenant security deposit will be applied to the last month of rent, the security deposit is reported as rental income when it is received.
- A refundable security deposit may also become rental income at a later date—for example, if part or all of the deposit is used to pay for damages caused by a tenant beyond normal wear and tear, unpaid rent, or legal expenses if a tenant is evicted. When situations like these occur, the portion of the deposit withheld from the tenant is recorded as rental income when the expense is incurred.
Note that the majority of jurisdictions place limitations on when and if a tenant security deposit can be withheld. So, a landlord may wish to seek legal advice or review the landlord-tenant laws for the state in which the rental property is located before withholding a tenant security deposit.
How to create a rental property income statement
A rental property income statement reports 4 main sections of information:
- Gross monthly rental income
- Operating expenses
- Net operating income
- Pretax net income
While every rental property is different, these are the most common data to include in each income statement section.
Gross monthly rental income
- Monthly rent collected
- Other rental income, such as:
- Application fees
- Late fees
- Pet or roommate rent
- Appliance rent
- Laundry usage fees
- Utility expenses passed through to a tenant
- Conversion of a tenant’s refundable security deposit
Itemizing gross income helps investors understand the different revenue streams a rental property generates and identify areas where income may be increased. Specific rental income sources also vary by property type.
For example, while a tenant in a single-family rental (SFR) usually pays directly for utilities, a multifamily landlord may pay master-metered utilities (such as water, sewer, trash, and gas) and then pass through a tenant’s share of the expense as additional rent.
Operating expenses on a rental property income statement may be divided into 2 sections. One section reports property operating expenses, while the second section reports owner expenses directly related to the rental property.
Operating expenses include:
- Advertising and marketing
- Bank fees
- Homeowner association (HOA) fees
- Other interest (such as a business credit card balance)
- Landlord insurance
- Landscaping and snow removal
- Leasing fees
- Licenses and permits
- Maintenance fees
- Pest control
- Professional fees
- Property management fees
- Property taxes
- Rental accounting software (free through Stessa, a Roofstock company)
- Sales or use tax (based on a percentage of rent collected in some cities and states)
- Supplies (for the property)
- Trash removal
- Utilities paid by landlord (water, sewer, and trash in a small multifamily building)
Owner expenses may include:
- Auto expense
- Continuing education (such as Roofstock Academy)
- Dues and subscriptions
- Office supplies
- Travel expense
As with gross income, operating expenses can vary by type of rental property. In most cases, tenants in SFR properties are responsible for utilities and keeping the home in good condition. In small multifamily properties, a landlord may pay for common area maintenance like keeping a shared laundry room or parking area clean and safe.
Net operating income
Net operating income (NOI) is calculated by subtracting operating expenses and owner expenses from gross income:
- NOI = Income – Expenses
NOI is used in rental property financial metrics such as cap rate and debt service coverage ratio (DSCR). Cap rate is the annual percentage return calculated by dividing NOI by property purchase price or value. Borrowers and lenders use DSCR to determine the mortgage amount that a property’s NOI can support.
When computing NOI, costs such as mortgage interest, owner expenses, depreciation, and capital expenses are excluded from the calculation. These expenses are not included in NOI because they may vary, such as when an investor accelerates depreciation.
Pretax net income
Pretax income is calculated by subtracting mortgage interest and depreciation expenses from NOI.
Rental property depreciation is a noncash expense that reduces the amount of taxable net income. Depreciation expense is why, in some cases, a rental property may generate positive NOI while allowing an investor to report a paper loss for tax purposes.
Residential investment real estate is depreciated over a period of 27.5 years. If the cost basis of a property (purchase price plus capitalized closing costs, less land value) is $110,000, then $4,000 per year in depreciation expense could be deducted from pretax net income for the next 27.5 years.
Download a free rental property income statement template
Some investors prefer to keep track of rental income and expenses manually by using a spreadsheet. We’ve created a free rental property income statement template for keeping track of income, operating and owner expenses, NOI, and pretax net income. Download the rental property income statement here.
Each section automatically calculates using the numbers entered, and there are running totals for each income and expense item at the far right and bottom of the template. This free income statement template also updates pretax income, making it easy to tell at a glance what the potential taxable income is as the year progresses.
The template is a Microsoft Excel document and is fully editable, so you can customize it to meet your specific business needs.
To download the template, select the link below, then select File at the top left corner of the page, select Download, then choose Microsoft Excel.
How to automate a rental property income statement
Investors looking for an automated rental property income statement can sign up for a free Stessa account. Stessa makes rental property finances simple with automatic income and expense tracking, personalized reporting to help maximize profits, and recommendations based on portfolio structure and investment strategy.
After signing up for a free account, simply enter the rental property address, link business banking accounts and the mortgage account, and view financial performance in real time from a single, comprehensive online dashboard. Stessa can be used with an unlimited number of portfolios of SFRs, small multifamily buildings, and short-term vacation rentals.
The best rental properties are the profitable ones. An accurate rental property income statement shows at a glance how profitable a rental property is and also offers insights into where gross rental income might be improved and operating expenses reduced to help you increase NOI.