Financial statements are critical for evaluating the performance of real estate investments. By reviewing key financial documents like the income statement, balance sheet, and cash flow statement, investors can assess metrics such as net operating income, capitalization rate, cash-on-cash return, and debt service coverage ratio. Benchmarking these figures over time and against industry averages allows investors to identify trends and opportunities. This article will provide an overview of important financial statements for real estate investments, key performance indicators investors should monitor, and examples of how to calculate and interpret common real estate financial metrics.
Income statement shows real estate operating performance
The income statement summarizes a property’s revenue and expenses over a period of time. For investment real estate, key line items include rental income, other property income like parking and laundry, operating expenses like utilities and maintenance, and net operating income. Comparing NOI year-over-year shows whether operating performance is improving. NOI divided by gross revenue is called the operating expense ratio, which can be compared to averages for similar properties.
Balance sheet indicates real estate asset values
A real estate balance sheet lists assets like land, buildings, fixtures and equipment. Liabilities include the mortgage loan balance. Net assets equal assets minus liabilities, representing the equity invested. Tracking asset values over time shows appreciation or depreciation. And the loan-to-value ratio indicates financial leverage and risk.
Cash flow statement shows real estate profitability
The cash flow statement shows how much cash is generated by operations, including rents received less operating expenses paid. It also shows cash spent on capital expenditures and financing activities like mortgage principal payments. Positive cash flow indicates the property is profitable on a cash basis, while negative cash flow means more cash is going out than coming in.
Key real estate financial metrics to monitor
In addition to standard financial statements, real estate investors may calculate metrics like capitalization rate, cash-on-cash return, and debt service coverage ratio. Cap rate shows the property’s rate of return based on NOI and market value. Cash-on-cash return measures annual pretax cash flow compared to the total cash invested. And DSR indicates the property’s ability to cover mortgage payments through its generated cash flow.
By reviewing financial statements and key real estate investment metrics over time, investors can identify trends and opportunities to maximize returns. Benchmarking performance against other properties and industry averages also provides valuable perspective into how a real estate investment is performing.