Real estate financial reporting serves many purposes, and it is utilized at every stage of the investment lifecycle. From valuing properties to sharing critical financial details with investors and lenders, real estate financial reporting is a critical aspect of managing the financial health of a real estate investment portfolio.
In today’s article, we will be examining a few distinct types of real estate financial reporting to better understand how these tools are used to communicate various aspects of real estate investing.
Depending on what is being communicated and who the information is being shared with, real estate investors can employ several types of financial reporting to achieve different goals, such as communicating the overall financial health of the business, facilitating decision-making in regard to investment opportunities, and maintaining regulatory compliance with the appropriate authorities.
Real estate financial statements provide an overview of the financial position of a real estate investment property or portfolio. These statements are typically produced at regular intervals for accounting and compliance purposes, but the frequency with which they are generated will mostly depend on their purpose.
For example, when an investment isn’t performing as expected, stakeholders may want to receive monthly financial statements to gain a deeper insight into the property’s performance and identify areas that can be improved in order to increase the asset’s income potential.
Financial statements can also be prepared on an ad hoc basis to meet requirements for certain events or situations, such as seeking financing or performing renovations.
Here are a few different examples of financial statements that real estate investment entities might use:
A balance sheet is a financial statement that is used to help investors assess the financial stability and overall value of a commercial real estate investment. By presenting the assets, liabilities, and equity of a real estate investment, investors can gain insight into the current standing of the investment at the time the report is prepared.
Assets — A balance sheet’s assets can also include several line items in addition to the actual property. These might include cash-on-hand, accounts receivable, and equipment that is used to maintain the property.
Liabilities — Liabilities, on the other hand, encompass all of the debts and expenses related to a property or the business as a whole. Liabilities will almost always include mortgages unless the property is owned outright. However, they can also be composed of accounts payable and other accrued expenses related to the maintenance of the property or its ongoing operations.
Equity — Equity represents the ownership interest of the real estate investment among its various stakeholders. This will take into account initial investments, retained earnings, and additional contributions from investors.
While balance sheets offer an overview of a real estate investment’s financial position from a certain point in time, income statements provide a more detailed view of revenues and expenses over a given period. This type of real estate financial reporting is usually generated either quarterly or annually to provide stakeholders with the necessary information to evaluate, track, and forecast an investment’s potential.
Rental income — Commercial real estate investments almost always rely on rental income to generate profits, and this key metric is included in the income statement. Rental income details will include monthly rent from current tenants, but it will also highlight other details, such as annual rent increases and other rental income streams, such as parking fees and vending machines.
Operating expenses — An income statement should also provide a detailed breakdown of all operating expenses associated with a real estate investment. These may include property management fees, maintenance costs, taxes, and utilities.
Net Operating Income — Once the income and expenses have been tallied up, the net operating income is calculated by subtracting expenses from income. This is a critical metric in real estate investing because it indicates the profitability of a real estate investment before debt servicing.
Another important form of real estate financial reporting, the cash flow statement, tells investors and owners about the liquidity and cash position of their investments. This statement provides a detailed, line-by-line breakdown of all inflows and outflows of cash associated with an investment or portfolio, allowing investors to make decisions and plan for the future.
Gross Potential Base Rent — The GPBR of a property reflects the total amount that a property could generate when it is fully occupied, and this metric will usually be the first item listed on an investment’s cash flow statement. However, commercial real estate properties are rarely fully occupied, which means that the statement will also need to reflect the amount lost through rental vacancies.
Net Base Rental Revenue — This metric is calculated by subtracting the general vacancy loss from the GPBR, giving us the total net income before considering the investment’s expenses and operating reimbursements.
Operating reimbursements — In order to maximize the profitability of a commercial real estate operation, investors may use a few different tactics to create additional revenue streams beyond their property’s base rent. These might include parking and storage income, as well as percentage rent, which is an additional rate that is charged based on the total sales or income of a renter.
Operating expenses —These expenses include all of the same maintenance and management costs mentioned in previous sections of this article, and this total must be calculated to give us an accurate portrayal of the investment’s financial position.
Once all of the inflows and outflows have been outlined in the cash flow statement, the total will be calculated to present the property’s current liquidity position. This real estate financial reporting is often used to communicate property data to stakeholders, but it can also be used to inform potential investors about the properties they may wish to purchase.