Real estate investments are an attractive source of long-term wealth, and owning rental properties is one of the ways to achieve financial stability. It is crucial to monitor your rental property's income and expenses to gain insights into how profitable it is and make informed decisions. One of the essential reports that every rental property owner should have is a profit and loss statement (P&L). In this blog, we'll explore what is a profit and loss statement for real estate rentals, why it's essential, and how to create one.
What is a Profit and Loss Statement?
A P&L statement, also known as an income statement, summarizes a rental property's financial performance over a specific period. A P&L statement shows the income earned, the expenses incurred, and the net profit or loss. The income includes all the rental income generated from the property and other sources, such as vending machines and laundry facilities. The expenses include mortgage payments, property taxes, insurance, repairs and maintenance, property management fees, advertising and marketing expenses, legal fees, and other expenses incurred to run the property. The net profit or loss is the difference between the income and expenses.
Why is a P&L Statement Essential?
A P&L statement is essential because it helps you measure the rental property's financial performance. It provides insights into how profitable your rental property is, highlights areas where you need to cut expenses, and helps you make informed decisions on the property's future. A P&L statement also provides the information needed to file taxes on your rental property. Without a P&L statement, you may miss vital deductions and overpay taxes.
How to Create a P&L Statement?
Creating a P&L statement can be done using spreadsheet software, such as Excel or Google Sheets. Start by listing the rental property's income and expenses in separate columns. Label each income and expense item and put them in their respective columns. Total each column and calculate the net profit or loss for the period. You can create P&L statements monthly, quarterly, or annually to monitor the rental property's financial performance over time.
Separating Activity by Property
If you own multiple rental properties, it's a good practice to separate the activity by property. This means creating separate P&L statements for each property to track the financial performance of each rental property independently. Separating data by property helps you identify which properties are generating more income and which ones need more attention. It also helps you make informed decisions on which properties to sell, keep or acquire.
In conclusion, profit and loss statements are essential reports that every rental property owner must have. Creating a P&L statement can be done using spreadsheet software and will help you monitor your rental property's financial performance, provide information for taxes, and make informed decisions. Separating activity by property is recommended for rental property owners with multiple properties. Regularly monitoring your rental property's financial performance can prevent potential pitfalls and ensure a stable source of long-term wealth.