Profit and Loss Statement on Rental Properties.. Mortgage?

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Profit and Loss Statement on Rental Properties.. Mortgage?

Nathan Waters
Rental Property Investor · St Joseph, MI · Member since 2015 · 302 posts · 106 votes

When you write up your profit and loss statement, how do you break down the mortgage? Is the interest, taxes and interest the only loss? I'm assuming principal is not written in the loss category even though it goes against your cashflow. I'm trying to create a profit and loss statement for a seller financing deal. I currently have 5 mortgages but have not been great at keeping track of the details such as costs associated with each individual property. I tend to lump everything together. Any advice? Thanks in advance.

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Nathaniel Aaron Chaney
Rental Property Investor · Chattanooga, TN · Member since 2017 · 10 posts · 13 votes
9y
So as far as the accounting is concerned you wouldn't put the principle in the profit and loss statement. The interest expense would be a "below" the line expense I.e. It is a non-operating cost. You'd put all the revenue from the properties first then you'd put all the expenses associated directly with the properties after that CoGS(cost of goods sold). Sum these and that's your Gross Margin. Next take out G&A and all operating expenses. Sum with Gross Margin and that's your EBIT (earnings before interest and taxes). Next subtract out interest expense and add in any interest income(probably none of that). That gives you net profit before taxes. Then subtract out tax expense. That final number is your Net profit or loss. The principle is accounted for on your balance sheet as you pay your loans you reduce your mortgage liability which increases your balance sheet.
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  • Josh C.Pro Member
    Property Manager · Indianapolis, IN · Member since 2010 · 1k+ posts · 1k+ votes
    9y
    Correct. Taxes and interest are expenses. Principle pay down is not. Which makes sense because it benefits you. I like to think of each month a few hundreds from each property goes into a little piggyback called my equity.
    1Reply
  • Josh C.Pro Member
    Property Manager · Indianapolis, IN · Member since 2010 · 1k+ posts · 1k+ votes
    9y
    Piggy bank.
    0Reply
  • Nathaniel Aaron Chaney
    Rental Property Investor · Chattanooga, TN · Member since 2017 · 10 posts · 13 votes
    9y
    So as far as the accounting is concerned you wouldn't put the principle in the profit and loss statement. The interest expense would be a "below" the line expense I.e. It is a non-operating cost. You'd put all the revenue from the properties first then you'd put all the expenses associated directly with the properties after that CoGS(cost of goods sold). Sum these and that's your Gross Margin. Next take out G&A and all operating expenses. Sum with Gross Margin and that's your EBIT (earnings before interest and taxes). Next subtract out interest expense and add in any interest income(probably none of that). That gives you net profit before taxes. Then subtract out tax expense. That final number is your Net profit or loss. The principle is accounted for on your balance sheet as you pay your loans you reduce your mortgage liability which increases your balance sheet.
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  • Nathan Waters
    OP
    Rental Property Investor · St Joseph, MI · Member since 2015 · 302 posts · 106 votes
    9y

    @Josh C. Thanks for the information. I appreciate it.

    @Nathaniel Aaron Chaney So where do you put an initial investment? Say I pay cash for a house or put down 30k? I'm assuming that also goes into assets on the balance sheet? I paid for quickbooks property manager over a year ago and never took the time to go through everything and input it. Its something I need to spend about a week working on. 

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  • Christopher Phillips
    Real Estate Agent · Garden City, NY · Member since 2016 · 3k+ posts · 1k+ votes
    9y

    @Nathan Waters

    Josh is correct. For "cash flow" calculations, yes. P&L, no.

    Reason being, the mortgage is debt service against the balance sheet since the mortgage would be a liability. The accounting entry would be debit to interest expense, debit to loan payable, debit to taxes, credit to cash.

    P&L would reflect rent as income, Less all the expenses, including property tax.

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  • Nathaniel Aaron Chaney
    Rental Property Investor · Chattanooga, TN · Member since 2017 · 10 posts · 13 votes
    9y

    Yes initial investment of cash would go into your property asset column.

    So say you bought a house for 100,000 and you did 30,000 cash and a 70,000 mortgage the entry would be:

    DR. Property asset 100,000

           CR. Cash 30,000

           CR. Mortgage 70,000

    So your assets have gone up by 70,000 and your liabilities have also gone up by 70,000. 

    And then as mortgage payments are made you increase your interest expense paid and decrease your mortgage payable liability. 

    The initial entry only effects the balance sheet and keeps the equation assets = liabilities + equity in balance.

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  • Matthew Pagan
    Investor · Carteret, NJ · Member since 2016 · 1 post · 0 votes
    2y
    Quote from @Nathaniel Aaron Chaney:
    So as far as the accounting is concerned you wouldn't put the principle in the profit and loss statement. The interest expense would be a "below" the line expense I.e. It is a non-operating cost. You'd put all the revenue from the properties first then you'd put all the expenses associated directly with the properties after that CoGS(cost of goods sold). Sum these and that's your Gross Margin. Next take out G&A and all operating expenses. Sum with Gross Margin and that's your EBIT (earnings before interest and taxes). Next subtract out interest expense and add in any interest income(probably none of that). That gives you net profit before taxes. Then subtract out tax expense. That final number is your Net profit or loss. The principle is accounted for on your balance sheet as you pay your loans you reduce your mortgage liability which increases your balance sheet.

     I'm hoping someone will clarify...

    Rents

    Advertising / Auto & Travel / Cleaning and maintenance / Insurance / Legal / Repairs / Supplies / Taxes / Utilities

    Mortgage interest

    Depreciation

    For long-term rentals...what would be an example of CoGS? And/or G&A
    that's not already included in your regular expenses? Assuming CoGs and
    G&A are zero...

    Revenue (rents) - operating expenses
    (Advertising + Auto & Travel + Cleaning and maintenance + Insurance +
    Legal + Repairs + Supplies + Taxes + Utilities + Mortgage interest +
    depreciation = Gross Margin (also your EBITD) ** Include interest and
    depreciation here?

    Gross Margin - interest = net profit before taxes

    net profit before taxes - (federal/state tax expense) = final Net profit or loss

    ** What about depreciation?

    Would you subtract depreciation just like interest to see your net profit before taxes?

    So would it look like this:

    Revenue (rents) - operating expenses (Advertising + Auto & Travel +
    Cleaning and maintenance + Insurance + Legal + Repairs + Supplies +
    Taxes + Utilities + Mortgage interest + depreciation = Gross Margin

    Gross Margin - mortgage interest - depreciation - taxes (federal/state) = Net profit or loss

    ~ Matt

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  • Ben Russell
    Member since 2023 · 50 posts · 41 votes
    2y

    I wouldn't include anything related to a mortgage. That is an acquisition cost that will vary depending on the buyers circumstances and thier finance situation. 

    0Reply
  • Jake BakerBusiness Member
    Flipper/Rehabber · San Diego, CA · Member since 2020 · 1k+ posts · 695 votes
    2y

    The principle of a loan is a liability account (money owed) so it would go on the balance sheet. Every month you likely pay a mortgage payment that includes:

    Principle paydown - Liability Account (Balance Sheet)

    Interest - Expense Account (P&L)

    Taxes & Insurance Escrow  - Asset Account (Balance Sheet)

    Once a year, your Mortgage company will pay your Taxes owed and Insurance Premium - both Expense Accounts (P&L) 

    [email protected]
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  • Jhonny Remy
    Accountant · United States · Member since 2023 · 5 posts · 2 votes
    2y

    From an accounting standpoint, you can reduce your rental income by the taxes and interest you pay on your mortgage, but not the principal. 

    You cannot deduct the whole cost of the property at once in your profit and loss statement as a lump sum. However, you can divide the cost of the property and expense it overtime as DEPRECIATION.

    When it comes to taxes, DEPRECIATION is a great source of savings. I would suggest that you talk to a professional so 1) your financial information is accurate  and lead to good decisions 2) you don't miss out on any tax saving opportunity

    0Reply
  • Porsha Fross
    Member since 2023 · 35 posts · 10 votes
    2y
    Quote from @Jake Baker:

    The principle of a loan is a liability account (money owed) so it would go on the balance sheet. Every month you likely pay a mortgage payment that includes:

    Principle paydown - Liability Account (Balance Sheet)

    Interest - Expense Account (P&L)

    Taxes & Insurance Escrow  - Asset Account (Balance Sheet)

    Once a year, your Mortgage company will pay your Taxes owed and Insurance Premium - both Expense Accounts (P&L) 

     @Jake Baker do you have a good Excel or Google Sheets template for this?

    0Reply
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