Prepare Your Rental Property Revenue Statement
First, calculate your expected earnings from the rental property in order to predict your monthly, quarterly, and annual revenue. This is an important part of your rental property investment business plan, which you can learn more about with our guide.
After calculating your expected earnings, you can put together your rental property's revenue statement. At that point, you will know how your costs may impact your net income.
Follow these steps to estimate your proceeds:
Step 1: Decide How Much You Want to Charge
If you already purchased the home and rented it out, your numbers should be based on your actual total revenue. Even if you haven't started, you can put together an estimated amount and make adjustments when needed.
There are several ways you can decide on a rental property price that will help you reach your desired income and, just as importantly, suit your potential tenants' budgets.
- Location: Study the average prices that other rental property owners are charging, specifically in your investment's neighborhood or area.
- Property Type: Identify houses that are similar to the one that you plan on purchasing. For example, if you want to invest in a three-bedroom house that was recently built, look at the typical rent that tenants pay for a home that's the same size and age.
- Estimate Price Range: At the start, you don't need to narrow down a specific or single price. Instead, based on your research, come up with a high, low, and average estimate.
- Calculate Periodical Earnings: Next, add up your estimated rent revenues per month, per quarter (i.e., three months), and per year. If you want to be even more specific, include a high, low, and average prediction in your buy and rent real estate financials.
Step 2: Account for Vacancies
Keep in mind that your rental property may remain empty for a few weeks or months, especially when you first purchase it and after tenants move out. This should be included in your revenue projections.
Let's assume, as an example, that you plan on charging tenants $1,000 per month. Therefore, your annual revenue will be $12,000. Yet when your renters' leases expire, you might have to spend an extra month cleaning the home and finding a new tenant, for instance.
As a result, your revenue statement should account for this.
Here is how you can calculate potential vacancy times for your rental property:
- Estimate how long it would take you to clean and repair (if needed) the home after the tenants move out. Similarly, try to predict how soon you could find a new renter.
- If you still haven't purchased your rental property, study the average vacancy times in your investment's area or neighborhood.
- Calculate your new estimated revenue per year.
Put Together Your P&L Statement for the Rental Property
Now that you calculated your potential revenue, you can add up the expenses to come up with your net income. Subsequently, you may adjust or remove certain costs in order to reach your desired take-home earnings (after expenses).
When you initially start planning your business model and day-to-day operations, write down each expense as you come across it. This way, you are much less likely to miss any hidden or unexpected costs.
The first part of your P&L statement should outline your revenue. After that, add up the expenses, which fall into the following categories:
Loan & Interest Payments
Most of the time, these costs are fixed and do not change unless you refinance the loan.
If you already closed the property or started talking to lenders, calculate your costs based on your existing or potential loan terms, respectively.
However, if you still haven't initiated those steps, doing some research can take you a long way. Find the number of years in the loan terms and interest rate that you might qualify for. This should be based on your personal credit score and income.
Calculating Your Rental Property Loan Payments
Some lenders have interactive tools that can provide you with the loan payment estimates after you enter your income and credit information. You could also research the average interest rate and number of repayment years in your zip code or neighborhood.
Whether you are a new investor or already started your rental business, here is how you can calculate your total loan payments and interest costs:
- Determine your remaining loan balance after the down payment. For example, if your rental property is worth $210,000 and you put down a 4.8% down payment (or approximately $10,000), your remaining balance will be $200,000. (Note: Your down payment is not included in your P&L statement. Instead, we add it to the break-even analysis).
- Find your annual costs. To do so, divide the loan balance by the number of payment periods. With a 20-year loan term and a $200,000 remaining balance, your payment will be $10,000 per year ($200,000 divided by 20).
- Similarly, find your monthly costs. Since there are 240 months in a 20-year period, your monthly loan payment will be expected to be about $833 ($200,000 divided by 240).
- Lastly, add up your interest rate to the annual and monthly payments. Since the rates depend on your remaining balance per year and other lender-related costs, we recommend using a built-in spreadsheet or similar online tools to make this calculation.
By completing the above steps, the first part of your expenses section in the P&L statement is ready.
Rental Property Operational Costs
These are your day-to-day business expenses. Unlike the loan payment and interest rate, you can easily change and adjust your operational costs. You should do so based on the desired income that you want to generate from your rental property investment.
Your P&L statement should include the following potential expenses:
Maintenance & Groundskeeping
This category entails pipe repairs, plumbing, lawn care, and other related costs.
If you plan on taking care of the maintenance yourself, account for equipment expenses. In the same vein, if you plan to hire an external company, make sure to contact a few maintenance service providers, or visit their websites to come up with an estimated cost.
You should also think about whether it is your tenants' or your responsibility to mow the lawn and care for the grounds.
Rental Property Insurance
Obtaining business insurance is crucial. A commercial policy will cover the cost of certain damages, such as those resulting from a flood or severe weather conditions.
Similarly, your business insurance pays for your legal expenses if a tenant gets injured and decides to sue you.
It is very easy to estimate the premiums. In fact, many insurance companies will give you a quote through their website.
First, you would fill out a form with certain details about your business, including its structure, number of years in operation, and general risk parameters. Afterward, you'll receive an estimated monthly premium.
There are a few steps that you can take to obtain a low-cost insurance policy. A carefully drafted lease that clearly outlines your tenants' and your responsibilities and, as an example, lowers the potential for conflicts or disputes.
In this case, since the insurance provider bears a lower risk, they might offer you a relatively discounted premium. The same applies if your property investment is structured as a limited liability company (LLC).
Click here to read more about how you can create a real estate LLC and the main advantages of choosing this business structure.
Cleaning Upon Move-Out
You may have to hire a professional cleaning company after your tenants move out. If you do so, include it in your P&L statement.
To come up with an estimated cost, you should first decide how much your security deposit will be and if any portion of that is a non-refundable (to the tenant) cleaning fee.
Decide on whether you want to hire a management company or not. If you do so, determine if you will pay them a fixed price, a percentage of your rental revenue, or a combination of both.
Equally as important, find out if the management company will also take care of the maintenance and cleaning. Include this in your calculations.
Finally, add up all of the above expenses to find your total operating costs.
This is the amount of money that you need to spend to advertise your rental property and find tenants.
Researching the local real estate market and learning about your potential renters can minimize your marketing expenses and boost your results.
For instance, you can drive around your rental property's neighborhood and look for popular locations nearby, such as shopping malls or restaurant plazas.
Similarly, try to figure out if families in the area have young children. For example, this can be done by spotting “kids at play” signs.
You should also keep an eye on the models and years of the parked vehicles. This can largely indicate the average resident's income range.
Visit rental listing websites, such as Craigslist and Zillow, and identify the most active ones in your area or neighborhood. From there, start creating posts to advertise your rental property.
Based on your research, the “Marketing Costs” section of your P&L statement should include the following expenses:
- Fliers and brochures, especially if you plan on hanging them up in local restaurants and shopping areas.
- Online advertisements and postings.
- Whether or not you want to hire a branding professional, or learn how to create a brand yourself. If it's the latter, consider taking an online design course and add the cost to your real estate financials.
- Other marketing essentials, such as a telephone and a website.
Recommended: Consider setting up a business phone line by using phone.com to protect your personal phone number and other information.
At the end of this section, add up your total marketing costs.
Above all else, investors should certainly keep additional costs in mind. By staying organized, your P&L statement will be accurate and you become less likely to omit small or miscellaneous expenses.
Here are some common costs that come with owning rental property:
- Business License: Your state, county, and city governments determine these fees, which you usually pay once per year. Create a calendar to ensure that you always remember and account for these expenses.
- Registration: This is another annual fee that you pay to your state and/or local government. It includes registering your business's name.
- Homeowners Association: In many areas, any homeowner (including rental property investors) must become a member of the association. Find out if you need to pay a monthly or annual membership fee and add it to your budget.
- Travel: If your rental property is located in a different city or state than where you live, you may have to travel. First, you should decide on what your responsibilities will be (such as maintenance) and how often you need to travel. Second, budget accordingly. On the other hand, account for gas and mileage if you live and invest in the same area.
- Other: Needless to say, when you incur any other miscellaneous business expenses, you should also include them in your property investment P&L statement.
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Your Pre-Tax Income
After you determine what your marketing, operational, and miscellaneous costs are, add them up and identify your total expenses. Next, deduct the amount from your revenues to calculate your net income.
To illustrate, here is an example:
- A rental property investor plans on charging tenants $1,400 per month in rent. They also expect the home to be vacant for one month in a year. Therefore, their annual revenues are $15,400 ($1,400 multiplied by 11 months).
- The same investor's loan and interest payments are $500 per month or $6,000 per year. Meanwhile, their operational and marketing expenses will be $150 per month ($1,800 per year). The monthly and annual miscellaneous costs add up to $100 and $1,200, respectively.
- The investor's total operational, marketing, and miscellaneous expenses are $750 per month or $9,000 per year.
- Based on the above, the rental property would generate $650 every month (the $1,400 in revenues minus $750 in expenses). When we account for the vacancy, the investor's annual net income is $6,400 ($15,400 minus $9,000).
Both the monthly and annual pre-tax profits should be noted in your rental property's P&L statement.
Adding Taxes to Your Real Estate Financials
As a landlord, there are three types of taxes that you should account for. The former two are levied by the state, while the latter is payable to the federal government.
- Property Taxes: This is a percentage of your property's value. For example, if you buy a house for $100,000 and the property tax is 1%, you owe your state government $1,000.
- State Taxes: Some states have sales taxes while others will tax your income.
- Federal Income Taxes: You may either combine your rental property's income taxes with your personal ones or file them separately. This depends on your business structure.
Since your tax amount is based on your net income, you should only calculate this expense after you complete the other sections of your real estate profit and loss statement.
You can calculate your taxes by following these steps:
Step 1: Compute Your Property Taxes
First of all, check your state's property tax rate. In some locations, it is less than 1%. Other states, however, may levy a higher percentage.
Secondly, multiply the tax rate by your rental property valuation. In our above example, a house that's worth $100,000 would have a $1,000 per year tax payment if the rate is 1%.
Keep in mind that property taxes are levied annually. Therefore, you should include property appreciation in your real estate financials and estimate your future years' tax burden accordingly.
To go back to our example, let's assume that the $100,000 home's value increased by 5% after the investor bought it.
Its new assessed worth is $105,000. Subsequently, the investor's new property tax burden is $1,050 per year (or 1% of $105,000).
To make your calculations easier, obtain a loan that adds your property taxes to your monthly payment. This way, you don't have to worry about setting money aside or re-calculating your owed amount every year.
Step 2: Identify Your State Taxes
Generally speaking, here are the most common types of taxes that state governments charge:
- Sales Tax: If your state has a sales tax, the amount will most likely be based on your revenues (as opposed to your net income after deducting the expenses).
- Income Tax: States that don't have a duty on sales tend to impose income taxes. Unlike the former, your income tax is determined by looking at your net profit (i.e. revenues minus costs).
Many locations' taxes vary from one industry to another. For example, a retail business may have an 8% tariff rate, but rental properties are only taxed at 3% of their sales amount.
To start calculating your state tax expenses, determine whether your state has a sales or income toll. Next, figure out the tax rate that applies to rental properties and real estate.
Step 3: Calculate Federal Taxes
When you add up your state and property taxes, deduct them from your net income. Afterward, you can compute your federal income tax.
Combining your real estate profits with other sources of income (such as a full-time job) makes the filing process easier and quicker.
Here is how you can calculate your federal taxes owed:
- Figure out your net profit after deducting property and state taxes (alongside the other expenses that we listed above) from your revenues.
- When you come up with your net income, add it to your total household earnings, including those from a full-time or part-time job.
- Identify your tax bracket and owed percentage. For example, if you make $50,000 per year from a full-time job and expect an annual net income of $10,000 from your rental property, your total earnings are $60,000. This puts you in the 12% tax bracket (if you're married) or the 22% one (for single filers).
- Next, multiply your tax bracket's percentage by your rental revenue. In our above example, you would multiply your $10,000 net income by 12% or 22% (based on your marital status). Apart from identifying your tax bracket, you shouldn't include other sources of earnings in your real estate financials.
- Lastly, work out your net income after property, state, and federal taxes are accounted for. Add it to the end of your P&L statement.
You may want to consider an S Corp tax status for your real estate company if you have an LLC or a corporation. As an IRS tax classification, an S corp can provide your real estate business with certain tax benefits. You can find out more if an S corporation is right for you with our LLC vs S Corp guide.
Estimate Your Future Real Estate Financials
Now that you calculated your earnings, added up expenses, and identified your tax rate, your revenue and P&L statements are ready.
First, the revenue statement should be its own section. After you add up your operational, marketing, and miscellaneous costs, you come up with your pre-tax income.
Subsequently, estimate your tax burden and add it to the end of your P&L statement. When you complete this step, you can move on to the next part of planning your real estate financials.
Needless to say, you should regularly update your P&L statement. This is because your rental revenues, associated expenses, and payable taxes will change from one year to another.
One of the main challenges after starting a business is having enough capital, especially when buying real estate properties. There are many ways to find funding (family, angel investors, etc,), but a more traditional route is to secure a business loan. You can learn more about how to build business credit, improve your business's credit score, and apply for a business loan with our business guides.
Recommended: Looking to Build Business Credit? Apply for an easy approval business credit card from Divvy and build your business credit quickly.
If you want to start drafting future projections, start by reading this article about forecasting your potential real estate financials and conducting your break-even analysis.