Are these financials poor performing or am I missing something.

15 Replies

So im looking over the financials of a two for one commercial property purchase. One of the buildings is a small storage facility and the other is a self serve car wash. Both the storage facility and the car wash are right next to each other.

While looking over there previous financial documents, all im seeing are negatives when it comes to net income. Ill place some info below of the documents so someone else can decide for them selves.

Just want to know, are these profit and loss documents as bad as they look? Would this property just be a bottomless money pit in its current state? Just wondering if someone see's the diamond in the rough im not based on these financials.

Thanks BP Community

Profit and Loss
January - December 2016
Total
Income
Car Wash Income1,681.75
Car Wash Cash Income769.00
Car Wash Credit Card Income5,114.60
Total Car Wash Income$7,565.35
Sales of Product Income45,623.81
Services580.00
Storage Unit Monthly Rents3,550.00
Uncategorized Income1,620.00
Total Income$58,939.16
Cost of Goods Sold
Supplies & Materials - COGS1,998.18
Total Cost of Goods Sold$1,998.18
Gross Profit$56,940.98
Expenses
Bank Charges1,350.78
Commissions & fees233.49
Disposal Fees777.96
Insurance1,716.81
Insurance - Liability2,317.96
Interest Expense8,301.77
Legal & Professional Fees99.90
Meals and Entertainment407.95
Postage And Delivery299.65
Refunds130.25
Rent or Lease12,227.25
Repair & Maintenance1,305.56
Supplies470.02
Taxes & Licenses3,997.52
Tools272.60
Travel0.00
Uncategorized Expense7,856.05
Utilities7,439.76
Total Expenses$49,205.28
Net Operating Income$7,735.70
Other Expenses
Depreciation27,928.00
Reconciliation Discrepancies0.01
Total Other Expenses$27,928.01
Net Other Income-$27,928.01
Net Income-$20,192.31

Profit and Loss
January - December 2015
Total
Income
Car Wash Income0.00
Car Wash Cash Income15,372.95
Car Wash Credit Card Income18,076.47
Total Car Wash Income$33,449.42
Sales50.00
Sales of Product Income19,178.84
Services140.00
Storage Unit Monthly Rents6,750.49
Total Income$59,568.75
Cost of Goods Sold
Supplies & Materials - COGS1,728.97
Total Cost of Goods Sold$1,728.97
Gross Profit$57,839.78
Expenses
Auto164.56
Bank Charges1,082.24
Bank Service Charges210.00
Commissions & fees120.00
Disposal Fees560.00
Dues & Subscriptions7.00
Insurance2,595.57
Interest Expense6,874.82
Job Materials51.87
Legal & Professional Fees922.50
Meals and Entertainment328.32
Office Expenses1,102.49
Other General and Admin Expenses188.06
Postage And Delivery96.20
Refunds204.34
Rent or Lease14,991.50
Repair & Maintenance6,441.66
Supplies690.66
Taxes & Licenses3,771.41
Tools378.90
Uncategorized Expense4,175.47
Utilities6,773.57
Total Expenses$51,731.14
Net Operating Income$6,108.64
Other Income
Other Ordinary Income1,025.20
Total Other Income$1,025.20
Other Expenses
Depreciation17,196.00
Total Other Expenses$17,196.00
Net Other Income-$16,170.80
Net Income-$10,062.16
Monday, Oct 16, 2017 07:31:51 AM GMT-7 - Accrual Basis

The NOI is positive. The Net Income is negative because you're taking on depreciation loss but that's not really a loss in the sense that it's not money out of your pocket. It's there so you will have a net loss and pay no taxes.

That was a very intelligent way of saying it. Took three semesters of accounting and i still dont know what those mean.

First thing I'm going to say is that their bookkeeper sucks.  Publishing financial statements to an investor that includes "Uncategorized Expenses" is the ultimate in unprofessionalism and is just downright wrong.  

Second question is whether you are purchasing JUST the businesses or are you also purchasing the real estate that goes with it. If the real estate and businesses go together, then that rent number is an artificial number that was picked for a tax planning purpose and is completely arbitrary. The rent "paid" may just be an accounting transaction over into a passive income LLC so that the ordinary income is engineered to show a loss.

If you're not purchasing the real estate then forget what I just said.

Third, there are a couple of other items in the statement that are somewhat arbitrary and may not be expenses you'll have.  This includes the Interest Expense, the Meals, the Legal & Professional and Office Expenses, so you can negate them if you're buying cash, but you'll want to account for interest if you're financing.

Fourth, their depreciation is not your depreciation.  Your depreciation will be based on purchase price allocated to equipment as well as purchase price not allocated to non-amortizable items.

Lastly, a car wash and storage facility are not as passive as you might think.  Even assuming you can do away with the arbitrary expenses, you're still buying at least a part time job that will cash flow $15,000 per year if you aren't buying the real estate, but would bring in closer to $30,000 per year if you are.

Curious why you don't like uncategorized, is "miscellaneous" better?

Originally posted by @Ronald Rohde :

Curious why you don't like uncategorized, is "miscellaneous" better?

No, it's not.

It's not just a semantics thing. They should be more transparent with what each dollar amount represents. What if on your next pay stub, they put your gross, and then they simply subtracted a dollar amount titled "Miscellaneous"? You would not be pleased.

Realistically, Uncategorized and Misc is the same. This is normally when you do not have that many GL accounts created.

The smaller your chart of accounts the better. When you start creating every GL to match an item you purchase, it becomes ridiculous. Most CPAs will just say put them in misc exp.

If you want to boil it down to what that amount consists of? As for a detailed general ledger. If they can't provide it, well then you can assume those numbers are made up. 

Just to clarify, that uncategorized expense your seeing is a quarterly expense to lease the land that the buildings are sitting on. If i purchased the properties i wouldn't actually own the land. Its supposed to be that amount every three months but for some reason its only showing up once on the yearly financial reports.

Why are there "interest" and "rent" expenses included in these numbers? If the building is owned by the seller, they would not be paying rent. And interest expense should not be factored in determining the NOI - I'm assuming this is on a note that the seller has on the property? As mentioned above, depreciation and meals, should also not be considered. These are used at tax time, not in determining financial performance of a property.

*Edit - I replied before your last one, so I didn't see the land lease part before my response.

Anthony - buying 'just' the business is very different from buying the land & business. If nothing else, you need to lock-in a very long term lease to fix those costs and base your valuation on the term of the lease since once it expires, the landlord can increase rates to the point that the business is no longer viable.

Originally posted by @Terry Miller :
Originally posted by @Ronald Rohde:

Curious why you don't like uncategorized, is "miscellaneous" better?

No, it's not.

It's not just a semantics thing. They should be more transparent with what each dollar amount represents. What if on your next pay stub, they put your gross, and then they simply subtracted a dollar amount titled "Miscellaneous"? You would not be pleased.

 What does GAAP say about Misc? Is there a rule of relative value? If I have a $1,000,000 P&L, I don't care if $100 in Misc is made up...

Regarding your pay example, I expect a paystub to reflect what I legally am entitled to, the law requires complete disclosures, but not necessarily down to the penny ($0.01), i'm ok with that if its the level of detail I expect. 

Back to this post, is your concern with Misc the GAAP rule that nothing can be uncategorized?

Originally posted by @Oren K. :

Anthony - buying 'just' the business is very different from buying the land & business. If nothing else, you need to lock-in a very long term lease to fix those costs and base your valuation on the term of the lease since once it expires, the landlord can increase rates to the point that the business is no longer viable.

 The lease currently has 18 years remaining but regardless I have decided not to go any further with the purchase process after some investigation. The sellers are asking 240,000 for both properties. The storage units only total 30 units with no security fence and the car wash has just four wash bays for customers. 

I could contract out and have a brand new large scale storage facility with an automated security gate built in Billings MT for a little over 122k. That would also include a small office building, a large open lot for people to park trailers, and over 80 large storage units. The storage facility im looking at has none of that.

The price tag doesnt justify the purchase, in my eyes anyway.

Anthony, at that price I think you made the right call. Only thing I’d consider is if the storage unit and wash were in the path of progress and on a busy street where there would be upside potential. I also don’t like the idea of leasing the land from the owners. That’s a big variable you would have limited control over unless you signed a long lease to guarantee those profits.

Let us know what you find next!

Originally posted by @Simon W. :

Realistically, Uncategorized and Misc is the same. This is normally when you do not have that many GL accounts created.

The smaller your chart of accounts the better. When you start creating every GL to match an item you purchase, it becomes ridiculous. Most CPAs will just say put them in misc exp.

If you want to boil it down to what that amount consists of? As for a detailed general ledger. If they can't provide it, well then you can assume those numbers are made up. 

 It's actually not the same thing.  Uncategorized Expenses is a default Expense account used by QuickBooks (I can recognize a QuickBooks formatted report a mile away) where, when you download the transactions from the bank and "Accept" them without indicating the proper expense, QuickBooks chooses "Uncategorized Expense" as a holding bucket so it can record the transaction.  (You can't record a transaction in QuickBooks without allocating it to a category).

So the stuff in that account could be literally anything.  A lazy bookkeeper downloaded transactions from the bank and didn't bother to allocate them property.

Piss Poor bookkeeping all the way around.

Originally posted by @Ronald Rohde :
Originally posted by @Terry Miller:
Originally posted by @Ronald Rohde:

Curious why you don't like uncategorized, is "miscellaneous" better?

No, it's not.

It's not just a semantics thing. They should be more transparent with what each dollar amount represents. What if on your next pay stub, they put your gross, and then they simply subtracted a dollar amount titled "Miscellaneous"? You would not be pleased.

 What does GAAP say about Misc? Is there a rule of relative value? If I have a $1,000,000 P&L, I don't care if $100 in Misc is made up...

Regarding your pay example, I expect a paystub to reflect what I legally am entitled to, the law requires complete disclosures, but not necessarily down to the penny ($0.01), i'm ok with that if its the level of detail I expect. 

Back to this post, is your concern with Misc the GAAP rule that nothing can be uncategorized?

 No, there's nothing in GAAP that indicates that Misc Exp has to have certain criteria (% or $ of total or whatever).  But it is best business practice to properly allocate expenses.  See my other post about where "Uncategorized Expenses" comes from in QuickBooks.  But when you put too many transactions into Misc, it makes it more difficult to truly understand where the expenses are going.  $10,000 of Misc Expense on a $1,000,000 or $10,000,000 of transactions is negligible and something that can be skipped over.  A couple thousand dollars on a P&L where the net profit is negative means that I would really want to know what that is.

The OP Indicated that this is one transaction that should have been properly categorized as a land lease expense, which holds to my theory that the transaction was downloaded and then not properly categorized.  Piss poor bookkeeping.

Originally posted by @Linda Weygant :
Originally posted by @Simon W.:

Realistically, Uncategorized and Misc is the same. This is normally when you do not have that many GL accounts created.

The smaller your chart of accounts the better. When you start creating every GL to match an item you purchase, it becomes ridiculous. Most CPAs will just say put them in misc exp.

If you want to boil it down to what that amount consists of? As for a detailed general ledger. If they can't provide it, well then you can assume those numbers are made up. 

 It's actually not the same thing.  Uncategorized Expenses is a default Expense account used by QuickBooks (I can recognize a QuickBooks formatted report a mile away) where, when you download the transactions from the bank and "Accept" them without indicating the proper expense, QuickBooks chooses "Uncategorized Expense" as a holding bucket so it can record the transaction.  (You can't record a transaction in QuickBooks without allocating it to a category).

So the stuff in that account could be literally anything.  A lazy bookkeeper downloaded transactions from the bank and didn't bother to allocate them property.

Piss Poor bookkeeping all the way around.

Well in terms of QB yes, but I'm speaking in a general sense. I use Yardi and since we don't have a default uncategorized expense I would have to create a misc expense.

As for the lazy bookkeeper downloading transactions, that's not how bank recs should be done. THIS defeats the purpose of reconciling if bank's transactions are imported to the system.

AR/AP needs to do the transaction as if the bills came separately. 

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.