3 Basic Financial Reports for New Landlords

December 18, 2024 6 min read

An Introduction To Basic Financial Reports

As a new landlord, understanding and utilizing key financial reports is essential for effective property management and informed decision-making. Three fundamental reports to focus on include a rent roll, profit and loss statement (P&L), and a pro forma statement. All of these reports serve a distinct purpose in evaluating your rental property’s financial health.

Rent Roll

A rent roll is like the heartbeat of a rental property. It provides an all-encompassing snapshot of income-generating units, making it a vital piece for tracking tenant occupancy, monthly rental income, and lease terms. This report is foundational for landlords, particularly those managing multiple units, as it consolidates all the critical data about tenants and income in one place

To create your own rent roll, start by organizing tenant details and lease information into a structured format, such as in a rent roll template excel sheet. A detailed rent roll typically includes:

Tenant names and contact information.
Unit details (e.g., apartment numbers or descriptions).
Lease start and end dates
Monthly rent amounts
Security deposit information
Payment histories (e.g., rent due dates and records of late or missed payments)

It’s important to update this document regularly to ensure accuracy. If you manage multiple properties, create separate rent rolls for each property or use property management software that can generate them automatically. Landlords and property owners who regularly update their rent rolls are often more prepared to plan for capital expenditures and can easily identify high-performing properties within their portfolio, as well as identify potential vacancies in their properties.

For example, if a rent roll shows multiple leases ending in the same month, you can prepare by advertising the units in advance to avoid vacancies. A rent roll can also highlight delinquent tenants, helping you decide when to issue reminders or enforce lease terms.

Profit and Loss (P&L) Statement

A rental property P&L summarizes your property’s financial performance over a specific period by detailing all income and expenses. This report will help you determine whether a property is profitable and identify areas for improvement.

A P&L (also referred to as a rental property income statement) allows you to evaluate the true cost of owning and managing a property. It provides insights into recurring expenses, such as maintenance or property management fees, and helps you decide if adjustments like increasing rent or cutting out unnecessary costs are needed. This report is also important for tax preparation and loan applications, as it demonstrates financial stability to potential lenders and investors and also provides you with a summary of your property’s income and expenses.

According to BiggerPockets, Net Operating Income (NOI), which is commonly included on a P&L statement, is often used by banks and investors to assess a property’s market value and financing potential. This emphasizes the importance of rental property income statements to ensure that your property is poised for refinancing opportunities, securing favorable loan terms, and attracting investors.

Below are a few tips on how to create a profit/loss statement:

List Income Sources: Include rent payments, late fees, and additional revenue like parking or laundry facilities.
Record Operating Expenses: Document costs for maintenance, utilities, insurance, and property taxes.
Calculate Net Operating Income: Subtract the total operating expenses from your total income.
Include Non-Operating Expenses: Add mortgage interest, depreciation, and taxes.
Determine Net Income: Subtract your non-operating expenses from the Net Operating Income.

Using a rental property P&L template can simplify this process, ensuring accurate calculations and organized reports.

Imagine you’re earning $50,000 annually from a property that incurs $35,000 in operating and non-operating expenses. The net income of $15,000 highlights the overall profitability. By analyzing the P&L, you may notice that $5,000 is recurring in HVAC repairs and decide to replace the system, therefore reducing future expenses and improving the long-term return on your investment.

Pro Forma Statement

A pro forma statement is a report that projects the future financial performance of a rental property. Unlike rent rolls or P&L reports, which reflect current and past data, a pro forma is forward-facing and helps you anticipate potential challenges and opportunities.

A rental property pro forma template allows you to evaluate potential investments, budget for major expenses, and forecast cash flow. It’s an important tool when it comes to growth planning, especially when you are considering property acquisitions and major renovations. A pro forma statement is essentially your personal long-term roadmap for your property’s financial goals.

The period that you’re analyzing with a pro forma statement can also be customized to align with your goals. For example, a 5-year pro forma projects financial performance over the next five years, helping you focus on mid-term planning like refinancing or upgrades. A 10-year pro forma, on the other hand, offers a broader perspective, allowing you to assess long-term profitability and the overall growth of your portfolio. Pro formas are a flexible and versatile tool when it comes to investment strategies.

Here are the important steps in creating one:

Project Income: Adjust your current rental income for anticipated increases, such as market-driven rent hikes or added amenities like parking spaces.
Estimate Expenses: Include expected operating costs, adjusting for inflation or expected repairs.
Plan for Capital Expenditures: Factor in one-time costs such as roof replacements or HVAC upgrades.
Forecast Occupancy Rates: Use historical trends or market data to estimate potential changes in tenant occupancy.
Calculate NOI and Net Income: Use projected data to determine rental property profit over time.

Let’s say you’re considering purchasing a property worth $400,000. You could use a pro forma statement to project an annual income of $40,000 and expenses of $25,000. After you finish accounting for non-operating expenses, the pro forma shows that you will likely achieve a net income of around $10,000, which can help you determine whether the property aligns with your future and current financial goals and overall investment strategy.

Build Experience with Basic Financial Reporting

Understanding and utilizing rent rolls, P&L statements, and pro formas is essential for any landlord who is aiming to manage their rental properties with financial precision. By utilizing rent rolls to gain insights into income and tenant details, P&Ls to analyze financial performance, and pro formas to forecast future outcomes, you can position your rental property business for sustainable growth. Whether you create them yourself or generate them with accounting software like Ledgre, these tools offer a complete picture of your property’s financial health, allowing you to make strategic decisions and achieve long-term success.