Understanding Profit and Loss Statements for Rental Property

Profit and loss statements (P&L) are one of the key reports rental property owners need to run their businesses. Also known as the “rental income statement” or “income expense statement,” this report summarizes a business’s transactions and calculates the profit (or loss). It shows where money is coming from and going to over a specified period.

Analyzing profit and loss is essential for landlords and property managers, so understanding the basics of the report is crucial. Today, we’ll discuss what you’ll find in an income statement, how to calculate profit or loss for your property, how to use P&Ls within your business, common mistakes to avoid, and more.

What’s included in a profit and loss?

P&L reports cover a set period and include the income, expenditures, and net operating income calculation for that time. The statement consists of three parts: gross income, operating costs, and net operating income. Do you have more than one property or unit? If so, you’ll need a P&L with a column for each door.

Section 1: Gross Rental Income

Gross income is the total revenue generated by the rental property before you deduct any expenses. So in this section, you’d include the unit’s rents plus any additional income associated with the property:

• Application fees
• Late charges
• Laundry fees
• Lease renewal fees
• Parking charges
• Pet fees
• Rents
• Storage charges
• Vending machine income

If you offer additional services, like meal options, concierge services, or transportation, that aren’t typically included in the rent, that income is included in a P&L statement, as well.

Key point: Record security deposits on your balance sheet, not the profit and loss statement. Security deposits only count as income if your tenant breaches the lease terms and you retain some or all of the security deposit. A refundable deposit that you’re holding until the lease ends isn’t reportable income.

Section 2: Operating Expenses

This section reports the costs associated with the day-to-day operations of your rental property. Your P&L report uses the chart of accounts categories to group expenditures, so the expense section of a rental property P&L frequently aligns with the IRS Schedule E categories:

• Advertising
• Auto and travel
• Cleaning and maintenance, including landscaping, snow removal, and pest control
• Commissions
• Insurance
• Legal and professional fees, including accounting costs
• Management fees
• Mortgage interest
• Repairs
• Supplies and small equipment
• Taxes, like property or sales tax, not income taxes
• Utilities, including phone, internet, and garbage collection
• Other, such as education, dues, subscriptions, licenses, etc.

Capital improvements, fixed assets, and loan principal repayments won’t show in this section; those belong on your balance sheet instead.

Section 3: Net Operating Income

Net operating income (NOI) shows the profitability of your investment property. The formula is simple:

Income − Expenses = NOI

Note: NOI is your before-tax income; in other industries, this figure is also known as EBIT, which stands for earnings before interest and taxes.

Despite its straightforward formula, NOI—and the income statement—play a key role in running your rental property business.

How to Use a P&L for Rental Property

With the information from your income statement, you can answer questions and gain insight into your property’s performance. Why is the rental over- or underperforming? Which areas of the business should you target to reduce costs? Which income streams are most profitable? Use your P&L for more than just assessing profitability—here’s how.

Evaluate Your Property’s Financial Health

For real estate investors, understanding a property’s financial health is essential, and your P&L statements are a key part of that. You can use the NOI to evaluate your investment, compare properties, and gauge their performance. The higher your NOI, the more profitable the property.

You can also analyze your P&L to look for income and expense trends. Creeping costs and dwindling income affect your profitability over time, so reviewing your statements regularly will help you catch issues early on.

Perform Comparative Analyses

Are you looking to expand your portfolio? Use the P&L statements from the properties you’re considering for a comparative analysis. The income statements will help you identify the property with the best return or most consistent revenue streams.

By reviewing the P&L statements for potential investments, you can also evaluate the potential risk for each property by asking questions. Is the income stable? Do the expenses fluctuate significantly? What are the market trends?

Appraise Properties and Secure Financing

Once you know a property’s NOI, you can appraise the rental unit by calculating its cap rate, which measures a property’s rate of return and helps you estimate a property’s fair value.

Having a healthy P&L also makes it easier to secure funding and more favorable financing terms. NOI can affect loan approval because lenders use it to assess your cash flow as part of the debt service coverage ratio.

This metric gauges your ability to repay debts, including repaying principal and interest on long- and short-term debt. Investors also use this ratio and a property’s NOI to make informed decisions about acquisitions, sales, or refinancing.

Manage Risk and Make Strategic Plans

Analyzing your P&L is another way to detect and mitigate financial risks for your rental property business. When you review your income statements regularly, you’re searching for potential issues.

For instance, if your utility costs are up unexpectedly, that might indicate a leak that your renters haven’t noticed or reported yet. By addressing the leak early on, you prevent a bigger, more expensive problem later on, thereby reducing your risk.

You can project the income and expenses for your investment property by reviewing the P&L and net operating income. These projections help you update your budgets, prepare for taxes, and form long-term investment plans, such as future improvements, refinancing, or property acquisitions. Based on market shifts and property performance trends in your P&L, you can adapt your strategies.

How to Calculate Profit or Loss on Rental Property

The net operating income formula is simple:

Revenue – Expenses = Profit (or Loss)

The difficulty lies in setting up the report, then tracking and recording the transactions that affect the income statement.

How to Set Up an Income Statement for Rental Property

The categories in your chart of accounts are used in the P&L, so the more detailed your chart of accounts, the more detailed your P&L may be. Just remember that too many details can complicate your reports or cause confusion. You don’t need an income line for each tenant from one property or an expense line for each vendor.

Think about what would be most helpful for your business, then refine your chart of accounts and reports to support your needs.

Pro tip: Aligning your chart of accounts and P&L with the Schedule E makes tax prep simpler.

Sample Income Statement for Rental Property

Beginner landlords often use templates or spreadsheets to create income statements, and many (but not all) property management or accounting platforms include the profit and loss statement in their reporting options.

Why do landlords need different versions of the P&L?

By reviewing different versions of your rental’s income statements, you’ll gain different perspectives of the property’s performance. These are the four most commonly used versions of the income statement for real estate investors.

Monthly

This version shows your property’s data for a single month. This snapshot view makes it easier to spot unexpected costs and irregularities.

Year to Date

The year-to-date income statement shows total income, current expenses, and NOI for the year so far. This version helps analyze overall performance and is a good indicator of your current taxable income.

Pro tip: A year-to-date P&L broken down by month makes it easier to spot trends in income or costs and budget variances.

Year-End

The annual, or year-end, income statement shows the property’s total income, costs, and NOI for the tax year. Use this version to prepare annual budgets and taxes, as well as to update key performance indicators, such as the cap rate.

Trailing 12 Months

Also known as the TTM or T-12, this form of the income statement covers the property’s performance over the last year from the current date. Use the T-12 to monitor the change in your property’s NOI.

Need a loan or mortgage? The lender may want to see a T-12, T-3, and rent roll.

Common Mistakes with Rental Property P&Ls

You want your rental property to be as profitable as possible, and your P&L can help you make that happen, as long as you avoid these common errors:

Not Classifying Transactions

Reports are only helpful if they’re accurate. Uncategorized income or expenses make it difficult to prepare reports, file taxes, and make informed decisions about the property.

Using P&L Spreadsheets and Templates

Spreadsheets require time to update and attention to detail for manual data entry. Problems with formulas or math errors can lead to missed deductions and incorrect reporting. Plus, each property needs a column on the P&L—every version. That’s a significant time commitment with considerable potential for errors.

Not Recording All Income

Sometimes landlords aren’t sure what counts as reportable rental income, so they don’t record some transactions. But if you leave transactions off your books, you don’t have complete records or full transparency in your business. And over- or underreporting income can have serious consequences, including IRS penalties and interest.

Skipping Report Reviews

Tempted to skip reviewing your reports? This mistake is easy to make if you’re short on time. But if you don’t review your reports regularly, you can’t make informed decisions. You’ll lose the chance to monitor your cash flow, key performance metrics, and income and expense trends. And you won’t be able to identify and correct potential issues or adjust your budgets and long-term plans.

Deducting Fixed Assets in Full

Fixed assets, or capital improvements, are significant investments that add value or extend the property’s useful life. These improvements are not fully deductible in the year they’re incurred, except under particular circumstances. So when you invest in a fixed asset, like a new roof or furnace, the purchase shows on your balance sheet, not the profit and loss.

You can recoup the cost of the asset through depreciation, a noncash expense that will show on your P&L. Incorrectly deducting fixed asset purchases will have a significant effect on your books—greatly reduced profitability—and it opens you up to IRS penalties if you get audited.

How TurboTenant Can Help

The income statement is a critical element for managing your rental property, so why rely on time-consuming, error-prone templates?

Skip the spreadsheets and save time with TurboTenant, rental property management software with an integrated accounting platform. We’re here to simplify bookkeeping and property management for your rentals.

Our platform is better than using outdated spreadsheets—no more manual data entry or fighting with formulas! Linked accounts, automatic imports, and customizable rules allow you to automate your account updates while ensuring accuracy.

Not an accounting whiz? No problem.

Unlike expensive generic accounting platforms, our bookkeeping software is designed especially for rental property investors like you. You don’t need an accounting degree or a bookkeeping background to use TurboTenant’s accounting and bookkeeping features.

Your chart of accounts is preconfigured for real estate, right from the first click. Plus, we’ve got transaction templates ready to help you correctly record items like security deposits or mortgage payments.

Stay on top of your rental’s financials with built-in reports, including balance sheets, rent rolls, cash-on-cash, and multiple P&L statements, all available at the unit, property, and portfolio level. We’ll help you get ready for tax time, too, with deduction reviews, Schedule E reports, and accountant access.

Say goodbye to spreadsheets and generic accounting options, and save yourself time, money, and headaches.

Sign up for a free TurboTenant account today!