One of the main reasons people invest in real estate is for the potential income the property can provide. A profit and loss statement for rental property helps investors to “keep their eye on the ball” and manage a property to increase overall returns.
- A profit and loss statement is a report that summarizes income, expenses, and net operating income over a specific period of time.
- A good profit and loss statement will help investors identify opportunities to increase gross rental income and reduce operating expenses.
- Net operating income reported on a profit and loss statement is used in other rental property financial calculations, including cap rate and debt service coverage ratio.
- Profit and loss statements can be generated for any period of time, including monthly, year-to-date, and year-end reports used to prepare tax returns.
What is a profit and loss statement for rental property?
A profit and loss statement for rental property is used by owners and property managers to track income and expenses and the corresponding profits (or losses).
Also known as an income statement or P&L, a rental property profit and loss statement reports the current financial performance of a property over a specific amount of time.
A good profit and loss statement also serves as a guide for identifying potential opportunities to increase income, reduce expenses, and maximize net operating income (NOI).
How a profit and loss statement works
A rental property profit and loss statement is divided into three sections: Gross income, operating expenses, and net operating income or NOI:
Gross income on a profit and loss statement includes revenue from the monthly rent collected.
This section also includes additional income such as pet rent, appliance rent, and revenues from covered parking and laundry room usage in multifamily properties. Application fees from prospective tenants and late fees from current tenants are also included as gross income.
Various types of gross income are normally recorded and assigned to a specific line item, depending on how the rental property chart of accounts is set up. For example, monthly rent may be line item 1000, pet rent may be line item 1001, and so on.
By itemizing gross income to source, real estate investors are better able to understand the different revenue streams that generate gross income, and identify potential opportunities to increase income.
Operating expenses are the second part of the profit and loss statement, and include all of the costs and expenses of owning and operating rental real estate.
As with gross income, operating expenses are usually assigned a specific line item for each type of expense. This makes it easier for owners to identify areas where expenses are higher or lower than expected, and to look for ways to reduce operating expenses to generate a higher potential return.
Different property types have different operating expenses. For example, a small multifamily property may have expense line items for utilities paid by the landlord and for common area maintenance like keeping a shared parking area safe and clean.
Operating expenses like these usually are not found with single-family rental homes, because in most cases tenants are responsible for utilities and keeping the carport or garage in good condition.
Common operating expenses found on a profit and loss statement include:
- Advertising and marketing
- Bank fees
- Continuing education
- Depreciation expense
- Dues and subscriptions
- HOA fees
- Interest – mortgage
- Interest – other (such as a business credit card balance)
- Landlord insurance
- Landscaping and snow removal
- Leasing fees
- Licenses and permits
- Maintenance fees
- Mortgage interest expense
- Office supplies
- Owner auto expense
- Pest control
- Professional fees
- Property management fees
- Property taxes
- Rental accounting software (free from Stessa)
- Sales or use tax (based on a percentage of rent collected in some cities and states)
- Trash removal
- Travel expense
- Utilities paid by landlord (such as water, sewer, and trash in a small multifamily building)
Oftentimes the operating expense section of a rental property profit and loss statement will be modeled after Schedule E (Form 1040) from the IRS.
For example, the rental property asset management software from Stessa allocates expenses and income to help make filing a Schedule E easier and more accurate.
After signing up for a free Stessa account, investors simply enter basic rental property information, link business banking and property mortgage accounts, then begin automatically tracking income and expenses at both the property and portfolio level.
Net operating income
The final section of the profit and loss statement reports net operating income (NOI).
Real estate investors use NOI in financial calculations such as cap rate and debt service coverage ratio (DSCR). Cap rate reveals the current and potential return from a rental property, while DSCR is used to determine the mortgage amount that a property’s net operating income can support.
However, before calculating cap rate and DSCR, expenses such as mortgage interest, depreciation, and capital expenses should be excluded from the total operating expenses so that NOI is accurate.
Free rental property profit and loss template
This free rental property profit and loss template has sections for rental income, operating expenses, net operating income, and pre-tax net income. There are rows for each income and expense item, and columns for each month, along with running totals at the far right and bottom of the template.
Each section automatically calculates using the figures you enter. The template also updates your pre-tax income or loss, so you can tell at a glance what your potential taxable net income or loss 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, click on the link below, then select File at the top left corner of the page, select Download, then choose Microsoft Excel.
Example of a rental property profit and loss statement
To illustrate, let’s look at an example of an annual rental property profit and loss statement, and how to calculate cap rate and debt service coverage ratio using NOI.
We’ll assume a rental property was purchased for $150,000 from the Roofstock Marketplace with a tenant already in place. When the lease came up for renewal, the investor received a discounted leasing renewal fee from their property management company to extend the lease with the current tenant.
To simplify this example, some expenses such as landscaping and pest control have been grouped together under the repairs and maintenance line item:
Profit and loss statement example
- Rental income: $14,340
- Pet rent: $600
Total Gross income: $14,940
- Property management: $1,090
- Leasing/renewal fee: $200
- HOA fee: $360
- Insurance: $900
- Repairs and maintenance: $600
- Property taxes: $1,500
Total Operating Expenses: $4,650
Net Operating Income: $10,290
- Mortgage interest1: $4,015
- Depreciation2: $5,091
Pre-tax Net Income: $1,184
1Mortgage interest is based on the owner making a 25% down payment ($37,500) and financing the rental property using a fixed rate mortgage with a 30-year term.
2Depreciation expense was calculated by subtracting the lot value of $10,000 from the property price of $150,000, then dividing $140,000 by 27.5 years.
Calculating the cap rate
Capitalization rate (known as cap rate for short) measures return on investment by dividing net operating income (NOI) by the property value or sales price. In the example above, the property’s cap rate is 6.9%:
- Cap rate = NOI / Property value
- $10,290 NOI / $150,000 property value = 0.686 or 6.9%
Cap rates should only be used to compare similar properties in the same real estate market or neighborhood. That’s because factors such as the property type (such as single-family vs. multifamily), neighborhood ranking, location of the property, and property tax rates all affect the average cap rate in a specific market.
Generally speaking, the higher the cap rate is the greater the potential return. However, experienced investors take care to calculate the cap rate accurately because sometimes sellers put off making repairs or self-manage a property to help increase the amount of net operating income.
How to calculate DSCR
Debt service coverage ratio (DSCR) is one metric that real estate investors and lenders use to determine the maximum annual debt service that the NOI from a rental property will support.
The DSCR formula looks like this:
- DSCR = NOI / Annual debt service
For example, if a rental property generates an annual NOI of $10,290 and the annual debt service is $8,500, the DSCR is 1.39:
- $10,290 NOI / $8,500 annual debt service = 1.39
Most lenders look for a debt service coverage ratio of at least 1.25 for a rental property. In other words, a lender wants to make sure that there is extra net operating income remaining after the mortgage has been paid, in case rental income is lower than expected or operating expenses are higher than anticipated.
By rearranging the DSCR formula, an investor can determine that maximum amount of annual debt service the property can support:
- DSCR = NOI / Annual debt service
- Annual debt service = NOI / DSCR
- $10,290 NOI / 1.25 DSCR = $8,232 annual debt service (principal and interest)
By understanding the maximum amount of annual debt a rental property can support, an investor can shop around for the best financing options offered by lenders and mortgage brokers.
Types of rental property profit and loss statements
Profit and loss statements provide an investor with a snapshot of the income (or loss) a rental property is generating over a specific period of time. Some of the most common profit and loss statements used by real estate investors include:
Reports the income or loss from a rental property for a given month. The net income a rental property generates can vary from one month to the next, and even be negative for a certain amount of time.
For example, if a vacant home is purchased, the property may generate a loss for the first few months. That’s because operating expenses begin the day the property is purchased, while rental income does not start until a tenant is found and rent is collected.
A year-to-date profit and loss statement reports a running total of income, expenses, and net operating income from the beginning of the year to the current month. If an investor generated a year-to-date report for January through July, for example, the report would show the total income and expenses for the first seven months of the calendar year.
A year-end profit and loss statement reports the property income or loss for the calendar year and is also used to prepare tax returns filed with the IRS, as well as the state that the rental property is located in.
In real estate, the best rental properties are the ones that turn a profit. An accurate profit and loss statement helps investors to identify areas where gross income might be improved, and where operating expenses can be decreased, to help increase net operating income.