How to Create Your First Rental Property Income Statement

December 18, 2024 7 min read

What Goes Into Creating A Rental Property Income Statement?

Creating a rental property income statement (sometimes called a profit and loss statement) is essential for landlords who want to understand their property’s financial performance. This document helps track expenses, income, and profitability, therefore offering insights that are invaluable for strategic planning and tax compliance.

Whether you’re using a rental property income statement template or starting from scratch, this article will walk you through the steps it takes to create a comprehensive income statement for rental property management.

What is a Rental Property Income Statement?

A rental property income statement is a financial report that details the income generated and expenses incurred for a property over a specific period. It provides a clear picture of your property’s financial health and serves as a key component in a landlord rental property income statement and balance sheet. Understanding how to create and interpret this statement can help you make smarter investment decisions and streamline tax reporting.

Components of an Income Statement

To create an effective income statement for rental property, you must first include and understand the importance of the following essential components. Each of these play a vital role in understanding your property’s financial performance:

Rental Income: This includes all income generated from tenant rent payments, late fees, and additional services such as parking or laundry facilities. According to the IRS, rental income must also account for advanced rent, lease cancellation fees, or any services tenants provide in lieu of rent.
Operating Expenses: These are regular costs required to manage and maintain the property, including repairs and maintenance, property management fees, utilities, property insurance, property taxes, and more. Tracking these expenses is essential for calculating profitability, cost reduction, and finding tax deductions.
Net Operating Income: Net Operating Income (NOI) is calculated by subtracting operating expenses from rental income. It represents the profitability of the property before considering non-operating expenses, such as mortgage interest or taxes. NOI provides you with a picture of how the property is performing operationally.
Non-Operating Expenses: These are costs that aren’t directly tied to the daily management of the property, such as depreciation, mortgage payments and interest, and any income tax owed on rental income. Including these ensures that you recognize all financial obligations associated with the property.
Net Income: This is the final profit or loss after all expenses, including both operating and non-operating, are deducted from the rental income. It indicates the overall financial success of the property during a specific period.

By incorporating these components, you can prepare a thorough and accurate rental property income statement. This document not only provides insights into current profitability, but also assists in planning, identifying areas for improvement, and ensuring compliance with tax regulations.

Gathering Financial Documents

The first step in preparing rental property income statements is to collect and organize all relevant financial documentation. These documents include:

Lease Agreements: Establishes tenant payments and rental terms.
Receipts: Documents costs for deductible expenses relating to repairs and maintenance, like appliance repairs or plumbing services.
Utility Bills: Documents utility costs for properties where the landlord is responsible for utilities.
Bank Statements: Verifies rent deposits and other property-related transactions.
Tax Records: Essential for ensuring compliance and identifying deductible expenses.

The IRS specifically requires landlords to maintain detailed records of all rental income and expenses, including proof of payments and supporting documents for deductions. For example, maintaining receipts for maintenance expenses ensures that deductions can be substantiated in the event of an audit.

By having these documents readily available, you can simplify the process of creating an accurate income statement for rental property, reduce the risk of errors, and stay compliant with your tax laws. This level of organization also aids in financial planning, enabling landlords to assess their property’s performance with heightened precision.

Calculating Rental Income

Calculating rental income is the next step in creating a comprehensive rental property income statement. This involves summing up all income generated from the property during the reporting period, which includes rent payments, late fees, and income from amenities such as parking spaces, laundry facilities, or storage units.

Imagine you manage a rental property and need to calculate your rental income for a one-month period. It would look something like this:

Rent from Tenant 1: $1,200
Rent from Tenant 2: $1,000
Late Fee from Tenant 1: $50
Parking Space Rental Fee: $100

The total rental income calculation would equal $2,350. Tracking all income sources ensures an accurate reflection of the property’s revenue.

The IRS requires landlords to report all forms of rental income, including advanced rent and service fees. Accurate calculations ensure compliance with tax laws and provide a solid foundation for further analysis in the income statement for rental property.

Itemizing Operating Expenses

Next, list all of your operating expenses related to managing the property. These may include:

Maintenance
Repairs
Property management fees
Insurance premiums
Utilities
Property taxes
Advertising and marketing
Tenant screening reports
Auto and travel expenses
Cleaning and tenant turnover expenses

Accurately itemizing these costs is critical for calculating the true profitability of your property and preparing a complete landlord rental property income statement and balance sheet.

Calculating Net Income

Calculating net income is a crucial step in assessing the overall profitability of your rental property. Here’s how to proceed:

Determine Net Operating Income. Subtract total operating expenses from your total rental income. Operating expenses include costs such as maintenance, property management fees, insurance, and utilities.
Subtract Non-Operating Expenses. These are expenses not directly tied to daily property operations, such as mortgage interest, depreciation, and taxes.
Calculate Net Income. Subtract the total non-operating expenses from your NOI. The result is your property’s net income.

Below is an example calculation:

Rental Income: $50,000
Operating Expenses: $20,000
Non-Operating Expenses: $10,000

NOI = $50,000 - $20,000 = $30,000

Net Income = $30,000 - $10,000 = $20,000

Here, the net income is $20,000, representing the property’s profitability after accounting for all expenses.

Assess and Analyze

After calculating your net income, it’s important to assess and analyze your rental property income statement to understand your property’s overall performance. This step allows landlords to identify strengths, weaknesses, and opportunities for improvement.

Identifying Trends: Review your expenses and income to identify patterns. Are utility costs increasing? Are repair expenses through-the-roof? Spotting trends helps in creating an accurate budget for future periods.
Pinpointing Underperforming Areas: If one property consistently shows lower profitability, you should investigate the reasons, such as high vacancy rates or excessive maintenance costs.
Setting Goals: Use the data from your income statement to establish realistic financial goals, such as increasing rental income by a certain percentage or reducing operating expenses.

For example, let’s say you notice that the maintenance cost for a property has increased by 20% in comparison to the previous year. You analyze the situation and discover the property needs a plumbing system upgrade. You can now address the issue and reduce recurring repair costs and improve the rental property profit.

Utilizing Financial Tools

Property management software and financial tools can simplify the process of creating and analyzing your income statement. Some key features to look for are:

Automated Tracking: Software like property management platforms can automatically categorize expenses and income, which minimizes manual errors.
Custom Reports: Rental accounting software can generate detailed reports tailored to your rental property, such as cash flow analyses or profit-and-loss statements.
Efficiency Gains: Tools like a rental property income statement template save time and reduce stress by automating calculations.

These tools may allow you to allocate your resources and time efficiently as other tedious tasks are simplified and automated.

The Benefits of Creating a Rental Property Income Statement

Creating a rental property income statement is more than just a financial exercise; it’s a strategic tool that provides critical insights into the performance of your investment. By understanding your income and expenses, analyzing trends, and leveraging financial tools, you can improve your property’s profitability and plan for future growth. With a well-prepared income statement, you’re better equipped to make informed decisions and maximize the potential for your rental properties.