What is a P&L and how to read a profit and loss statement for rental property and real estate investing.

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This is a quick video I made about  a Hero’s experiment…

What is a P&L and how to read a profit and loss statement for rental property real estate investing.

 

Profit and Loss Statements.

There is a little bit of a difference between some profit and loss statements, and knowing the difference is important in helping to configure your bottom line.  As an investor, these are important things
to consider before you buy an investment property, and while holding onto properties.

Why the Profit and Loss is so important before you buy a rental or any other property?

Of course you are going to need to know the ins and outs of an investment property before you buy one. The main point to consider when looking at a P&L is this:

Is it and actual P & L or a Pro-Forma P&L?

The difference between the two is the reserve components:

Maintenance Reserve and Vacancy Reserve.

Let’s talk about the maintenance reserve first.

Maintenance Reserve:

Things break down, that’s part of life for everyone. Having the funds built in to cover repairing or replacing these broken down items is like having your own back up plan ahead of time.

Let’s look at an example actual P&L on a $60K SFH.

Let’s look at an example actual P&L on a $60K SFH.

We have income for monthly and yearly.

Rental Income:

Monthly: $800  Yearly: $9600

Expenses: $0

Taxes:

Monthly: $72.00  Yearly: $864.00

Utilities:   $0 

Insurance:

Monthly: $70.00  Yearly: $840.00

Management Fee: $0

Maintenance Reserve:

Monthly: $100  Yearly: $1,200

Vacancy Reserve:

Monthly: $100  Yearly: $1,200

Total Expenses:

Monthly: $142  Yearly: $4,104

Total Income:

Monthly: $658  Yearly: $5,496

Net ROI:  9.16%

Now then…

Here is a Pro-Forma P&L (Profit and Loss) on the same $60,000 house..

Here is a Pro-Forma P&L (Profit and Loss) on the same $60,000 house…

Rental Income:

Monthly: $800  Yearly: $9600

Expenses: $0

Taxes:

Monthly: $72.00  Yearly: $864.00

Utilities: $0

Insurance:

Monthly: $70.00  Yearly: $840.00

Management Fee: $0

Total Expenses:

Monthly: $142  Yearly: $1,704

Total Income:

Monthly: $658  Yearly: $7,896

Net ROI:  13.1%

You can see a big difference here in the numbers from the two different style P&L statements.

When going into an investment taking a look at the properties actual P&L gives you a much clearer picture of your projected ROI.  Asking to see the books before you buy is going to give you the most
clear idea of the properties actual income and expenses.

But even that can be tricky, so look carefully at the Profit and Loss Statements.

Investors need to be aware of ‘cooked books’ or those that are not accurately kept on purpose to make a property look better on paper than it actually is or would be in real life.

When holding onto a property, it’s important to keep accurate P&L statements for two big reasons:

So you know where your money is going and when your go to see, you have accurate information to bring forward to a potential buyer.

Here are some other helpful places like SmartSheet.com where you can download and create profit and loss statements for free.  Also BudgetTracker.com offers free expense tracking and creates P&L statements for free. Here are some free Microsoft Office Profit and Loss Statement templates you can use with Word and/or Excel.

Thanks so much!

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