If you’re like most real estate investors, you probably ran a bunch of numbers before you acquired your most recent investment property. Maybe you built a custom Excel model to project your net operating income, cash-on-cash return, and rent growth. Or maybe you used an online real estate investment calculator. There are a lot of great tools out there for evaluating potential acquisitions, but seasoned investors know that your pro forma goes out the window the day you close.
Do You Really Know How Your Property is Performing?
Less experienced real estate investors tend to quickly get swept up in the chaos of owning and operating their real estate assets. They often fail to track income and operating expenses with enough detail and precision to generate an accurate view of what’s really going on at a property.
Hiring a property manager can help, but it’s never quite the silver bullet you expect it to be. The best property managers always seem to have too many buildings to cover and there are always owner-level expenses that escape property management’s domain. Things like mortgage payments, property taxes, insurance, and capital expenses are often handled directly by owners, which means you’ll have to do at least some of your own reporting.
You also may want to classify certain items differently than your property manager. Either way, you’re the owner and you’re the only one who really cares enough to make sure your income is going up and your expenses are going down.
Stessa’s Automated Income & Expense Tracking
Savvy real estate investors build systems and processes so they can quickly identify problems and compare actual results to their projected budgets. This is where Stessa’s automated income and expense tracking really shines.
After you add an investment property to Stessa, you can link a bank, credit card, or mortgage account or import data from AppFolio. Stessa then auto-categorizes as many property expenses as possible and leaves the remainders for you to categorize via our searchable drop-down menu. Our transaction categories closely track the IRS categories for both Schedule E and Form 8825, which makes tax reporting quick and easy.
Create an Income Statement for Your Rental Property
There are many good reasons to get in the habit of producing a clean Income Statement on a monthly basis. Regular scrutiny of key income and expense line items often yields insights and opportunities that otherwise might go unnoticed. Once you’ve run monthly Income Statements for a few months, you’ll start to get a feel for what each expense category looks like in a “normal” month.
It then becomes progressively easier to spot outliers and adjust your focus accordingly. Producing your own Income Statements is also a great way to keep tabs on your property manager and compare actual results to your pro forma budgeting or acquisition model.
Once all your Transactions are in order, you can use the button at the top of the Transactions Page to generate an Income Statement. You can run a statement for year-to-date, calendar year, or any custom date range. You can also run Income Statements by month for any one Property or a consolidated statement across multiple properties in a single Portfolio.
Be sure to check the box next to “Category Details” if you want a detailed Income Statement with a line item for each sub-category for which there were Transactions during the selected timeframe. If a sub-category has no Transactions, it will be omitted from the report entirely.
What’s So Special About Net Operating Income?
Net Operating Income (NOI) provides perhaps the clearest picture of the day-to-day performance of a rental property. NOI is not impacted by mortgage payments, fund management fees, or lumpy capital expenses. It goes up when you raise rents and it goes down when your insurer increases premiums.
Surprises that show up in NOI are nearly always indicative of some real event that happened at a property or with one of your vendors. Maybe a tenant didn’t pay rent. Maybe there’s a water leak. Investors that closely track NOI on a rolling monthly basis are much more likely to identify problems and opportunities that their property manager missed.
Let’s say you uncover something that improves NOI by fifty dollars a month. That’s not only a $600 annual increase to cash flow, it’s a net valuation increase of $12,000 at a 5% cap rate. That’s something worth paying attention to!
To find your own opportunities to increase NOI, set up your first property on Stessa. It’s free to get started!