As the owner of a single-family rental in Texas, it’s essential to realize that income-producing real estate is very much like running a business. To ensure the financial health of your investment, it’s imperative to be familiar with certain key financial statements. Our management company understands this need and provides annual statements to assist owners and their accountants during tax season. We also deliver monthly general ledgers reflecting all the income and expenses tied to a property.
However, we recognize that some owners prefer a comprehensive financial picture, which includes a cash flow statement, income statement, and balance sheet. We strongly advise landlords to be proactive and review these documents at least quarterly to stay on top of their investment’s performance.
Our use of Appfolio software simplifies this process, seamlessly generating these financial statements and making them accessible to you via email or through a dedicated online portal.
Cash Basis vs. Accrual Basis Accounting
Financial statements can be compiled under two different accounting methods: cash basis or accrual basis. While discussing these differences is outside the purview of this post, it is noteworthy to mention that the majority of our single-family home owners prefer the cash basis method for both statement compilation and tax preparation.
The Income Statement or Profit and Loss Statement
An income statement is a financial report that displays a company’s revenues and expenses over a specific period, ultimately revealing the net income earned.
For landlords of single-family rentals, the income statement will outline the property’s income streams, such as rent, application fees, late fees, and forfeited security deposits. It also lists expenses, which are subtracted from income, including management fees, repairs, and maintenance. What you’re left with on this statement is the net income generated by the property.
Cash Flow Statement
The cash flow statement is a financial document that details the actual cash generated and used over a period.
For single-family homes, this statement typically delineates all cash inflows (like income) and outflows (expenses). It also reflects the equity accounts, capturing owner contributions and distributions made by the management company, painting a clear picture of the property’s liquidity.
Balance Sheet
A balance sheet provides a snapshot of a company’s financial condition at a particular moment in time, displaying assets, liabilities, and owners’ equity.
In the context of single-family home rentals, balance sheets are simpler than those for commercial properties. They often show a modest reserve of cash for repairs as an asset, the tenant’s security deposit as both an asset and a liability, and any owner funds pending disbursement. While Appfolio-generated balance sheets don’t show depreciation, it’s an important consideration for the owner’s tax returns, where the depreciation of the property’s improvements will typically be claimed.
In conclusion, understanding these financial statements is crucial for the successful management of your rental property. As a landlord, you’re not just an owner but a business operator, and staying informed through these financial reports is integral to ensuring your investment remains profitable and prepared for future growth. By leveraging tools like Appfolio and staying engaged with the financial health of your property, you can navigate the complexities of real estate investment with confidence and clarity.