Just as savvy house hunters would make sure they could afford a potential purchase before making an offer— factoring for the down payment, mortgage rates, monthly payments, and other ownership costs—real estate organizations, property management firms, and investors must carefully evaluate their financials to steer their strategic business decisions. Their financial statements serve as a guiding light, not only for business owners and executives, but also for investors and lenders that want to be sure they’re backing companies with strong revenue streams, healthy balance sheets, and sustainable cash flows.
What Are Financial Statements?
Financial statements are reports that summarize an organization’s financial standing for a specific accounting period, such as a month, quarter, or year. The three core documents are the income statement, the balance sheet, and the cash flow statement. These interrelated reports are used by internal and external stakeholders, such as investors, creditors, and regulators, to evaluate a company’s financial health and make strategic decisions.
In the United States, publicly traded companies must prepare their financial statements in accordance with Generally Accepted Accounting Principles (GAAP), which provide a standardized framework for reporting. Many private companies follow GAAP rules, as well. In Europe and other parts of the world, organizations typically follow International Financial Reporting Standards, which serve a similar purpose as GAAP.
What Are Real Estate Financial Statements?
Real estate financial statements provide a snapshot of a firm’s financial position, performance, and cash flow for a set period of time. These statements yield insights into revenue, expenses, and overall profitability, as well as a company’s liquidity and solvency—that is, whether it has cash on hand, what type of debt it might be carrying, and how efficiently it is run. Viewed together, real estate financial statements provide important information about business performance, creditworthiness, and a firm’s ability to make informed decisions about property acquisitions and sales.
Key Takeaways
- Real estate organizations use the same foundational financial statements as other industries to track profitability, net worth, and cash flow.
- Real estate-specific metrics include net operating income, capitalization rate, and gross rent multiplier.
- Methods to assess real estate financial statements include horizontal, vertical, and ratio analysis.
- Automating data collection, accounting processes, and complicated number-crunching helps ensure the accuracy of real estate financial statements.
Types of Real Estate Financial Statements
Real estate companies rely on three primary financial statements—the income statement, balance sheet, and cash flow statement. Each one tells its own story about a specific accounting period, but together they demonstrate the operational efficiency, profitability, and overall health of business operations and property portfolios.
Let’s examine all three, along with examples of statements for the fictional Town Center Holdings, which acts as landlord of three commercial entities as well as tenants inhabiting the apartments above the stores.
Income Statement
The income statement communicates a real estate company’s revenue, expenses, gains, losses, and profit over a particular period. Also known as a profit and loss, or P&L, statement, it sheds light on how well the company is managing its business and individual properties, and whether it’s generating sufficient income to cover its expenses and debts.
The income statement itemizes the following components:
- Revenue is the total amount of money earned from a company’s primary business activities. Sources of revenue for real estate companies include rental payments, property management fees (for service providers), late payment penalties, parking fees, application fees, and storage fees.
- Cost of sales, like cost of goods sold, refers to the direct costs associated with generating revenue from real estate activities. Examples include land acquisition costs, marketing, and commissions paid to agents.
- Gross profit is the amount of revenue that remains after deducting the cost of sales.
- Operating expenses are the day-to-day costs of running a business. Examples include property management fees (for service recipients), sales commission, maintenance fees, utilities, insurance, and property taxes.
- Operating income is the amount of gross profit that remains after operating expenses are deducted.
- Non-operating expenses are the costs associated with running a business outside of its core operations. Examples include losses on property sales, interest paid on mortgages and other debts, and investment losses.
- Non-operating income includes gains on property sales, interest income, and dividends.
- Net income appears at the end of the income statement. It is the final amount of money a company has left, in profit, after factoring for non-operating expenses, taxes, and interest. If expenses exceeded revenue, the company will record a net loss.
Town Center Holdings’s income statement looks like this:
Income Statement Town Center Holdings For the Year Ended December 31, 2023
| Revenue | |
| Commercial Rental Income | $750,000 |
| Residential Rental Income | $500,000 |
| Total Revenue | $1,250,000 |
| Operating Expenses | |
| Property Maintenance | $150,000 |
| Utilities | $100,000 |
| Property Management Fees | $75,000 |
| Property Taxes | $200,000 |
| Insurance | $50,000 |
| Depreciation | $125,000 |
| Total Operating Expenses | $700,000 |
| Operating Income | $550,000 |
| Interest Expense | $200,000 |
| Income before taxes | $350,000 |
| Income Tax Expense (25%) | $87,500 |
| Net Income | $262,500 |
Balance Sheet
The balance sheet contains information about a real estate company’s assets, liabilities, and equity.
- Assets are resources that a real estate company owns or controls and are expected to result in future economic value. This category includes current assets, such as cash and accounts receivable; buildings and equipment; and less tangible assets, such as lease agreements.
- Liabilities are debts and obligations—in other words, money the real estate company owes to others—such as “current” obligations (due within one year), including taxes and wages, as well as long-term commitments, such as mortgages and loans.
- Equity is the net worth of a company; it’s the amount of money that remains after subtracting liabilities from assets. For a financially healthy real estate company, equity would be positive, signaling long-term financial stability. A negative equity suggests the company may struggle to meet its long-term debt obligations and perhaps face solvency concerns.
The relationship among these three components indicates whether the company can meet its short-term obligations (liquidity), how it finances its properties (leverage), and its overall net worth.
Town Center Holdings’s balance sheet looks like this:
Balance Sheet Town Center Holdings As of December 31, 2023
| Assets | |
| Cash and Cash Equivalents | $500,000 |
| Accounts Recievable | $50,000 |
| Prepaid Expenses | $25,000 |
| Property and Equipment (net) | $9,000,000 |
| Total Assets | $9,575,000 |
| Liabilities | |
| Accounts Payable | $75,000 |
| Accrued Expenses | $50,000 |
| Security Deposits | $100,000 |
| Mortgage Payable | $5,000,000 |
| Total Liabilities | $5,225,000 |
| Equity | |
| Common Stock | $3,000,000 |
| Retained Earnings | $1,350,000 |
| Total Equity | $4,350,000 |
| Total Liabilities and Equity | $9,575,000 |
Cash Flow Statement
A real estate company’s cash flow statement creates a detailed picture of the cash and cash equivalents that came into and went out of the business during a specific accounting period. It categorizes cash flows into three types of activities:
- Operating activities describe the cash generated from rental income and day-to-day property operations.
- Investing activities show cash flows related to property acquisitions, sales, and capital improvements.
- Financing activities reflect cash flows from debt financing, equity financing, and any payments to investors or owners.
The relationship among these three activities demonstrates the company’s ability to generate income from its properties, fund operations, pay its debts, and make new investments, while also showing how well it manages its cash and uses borrowed money (i.e., leverage).
Town Center Holdings’s cash flow statement looks like this:
Cash Flow Statement Town Center Holdings For the Year Ended December 31, 2023
| Cash Flows from Operating Activities | |
| Net Income | $262,500 |
| Adjustments for non-cash items: | |
| Depreciation | $125,000 |
| Changes in working capital: | |
| Decrease in Accounts Recievable | $10,000 |
| Increase in Prepaid Expenses | $5,000 |
| Increase in Accounts Payable | $15,000 |
| Increase in Accrued Expenses | $10,000 |
| Net Cash Provided by Operating Activities | $417,500 |
| Cash Flows from Investing Activities | |
| Purchase of Property and Equipment | $200,000 |
| Net Cash Used in Investing Activities | $200,000 |
| Cash Flows from Financing Activities | |
| Repayment of Mortgage Principal | $150,000 |
| Dividends Paid | $100,000 |
| Net Cash Used in Financing Activities | $250,000 |
| Net Increase in Cash | $32,500 |
| Cash at Beginning of Year | $532,500 |
| Cash at End of Year | $500,000 |
How to Interpret Real Estate Financial Statements
Financial statements provide critical data about a real estate company’s financial health and operational efficiency, but turning this data into actionable insights requires systematic analysis. Indeed, the interpretation of the data and the relationships among the various types often informs executive decisions about whether to buy more property, raise rent, find more affordable vendors, and other aspects of business strategy and operations. From the perspective of a potential investor or lender, financial statement analysis can reflect the sustainability of an investment and a business’s creditworthiness.
There are three primary methods used to analyze financial statements.
- Horizontal analysis compares financial data over time to identify trends and changes in performance. For example, it can show whether revenue is growing, expenses are being managed effectively, and profitability is improving—or the opposite.
- Vertical analysis, also known as common-size analysis, expresses each line item on a financial statement as a percentage of a benchmark value on that same statement. For example, this could be calculating each line item on the income statement as a percentage of total revenue in order to reveal which expenses consumed the largest portion of revenue and to pinpoint areas in need of efficiency improvements.
- Ratio analysis compares financial data to evaluate various aspects of business performance—everything from profitability to debt levels to cash flow. For example, operating profit margin shows the percentage of rental income that remains after operating expenses are paid, while the debt-to-equity ratio reveals how much a company relies on borrowing vs. owner investment to finance its properties.
These analytical methods become even more valuable when used to compare companies. Doing so helps stakeholders better understand relative strengths and weaknesses, performance in relation to industry benchmarks, and market positioning.
How to Assess a Real Estate Company’s Financial Strength
Operating profit margin and the debt-to-equity ratio, previously mentioned, are two key metrics for assessing a real estate company’s financial strength. But many others come into play that offer different lenses into performance, liquidity, and investment value. Included among these metrics:
- Net operating income (NOI) is a key metric for real estate investors and lenders. It evaluates how well specific properties are generating income relative to their operating expenses. Here is the formula:
NOI = Revenue – Operating expenses
- Capitalization rate (cap rate) is the ratio of NOI to the current market or purchase value of a property. Investors use cap rate to gauge the expected return on an investment and to compare different properties or markets. Here is the formula:
Cap rate = Net operating income / Property value
- Gross rent multiplier (GRM) regards the purchase price of a property relative to its gross rental income, which assumes occupancy and full payment. A lower GRM is better; investors may compare this number across properties to decide which one to buy. Here is the formula:
GRM = Property price / Gross annual rental income
- Operating expense ratio (OER) contrasts a property’s operating expenses with its gross operating income, which includes all revenue streams directly related to the property’s primary function. The lower the OER, the better that expenses are being managed, showing higher potential profit.
OER = (Operating expenses / Gross operating income) x 100
- Return on investment (ROI) shows how efficiently a property uses all invested capital—both cash and borrowed money—to generate profit. The higher the ROI, the more likely it’s a good investment opportunity. Here is the formula:
ROI = (Net profit / Total investment) x 100
- Cash-on-cash return (CoC) measures a property’s annual cash flow compared to the actual cash initially invested in it. It focuses on out-of-pocket expenses, helping investors assess how quickly they would recoup their initial cash outlay. Here is the formula:
Cash-on-cash return = (Annual cash flow / Total initial cash invested) × 100
- Debt service coverage ratio (DSCR) shows how well a property can create enough cash flow to cover its debt payments. A DSCR ratio of 1.0 or higher indicates that the property generates sufficient income to cover its obligations, which means less risk for a lender or investor. Here is the formula:
DSCR = Net operating income / Total debt service
- Loan-to-value (LTV) ratio weighs the amount of a loan in relation to a property’s market value or purchase price. Lenders use LTV to assess risk—a lower LTV ratio typically means lower risk and, in turn, better loan terms. Here is the formula:
LTV = (Loan amount / Property value) x 100
How to Automate Real Estate Financial Statements
Accurate financial statements are a must if sound real estate investment and management decisions are to be made. However, manual preparation of these statements—replete with numerous data points and complex calculations—can easily introduce errors. Something as “minor” as a misplaced decimal can throw off cash flow projections or lead to erroneous investment analyses.
Automation helps eliminates these issues. But beyond minimizing the likelihood of mistakes, automation saves time, ensures reporting consistency, and provides real-time insights. Follow these steps to automate your real estate financial statements.
- Select the right software: Choose real estate accounting software with built-in property management capabilities. Standout features include automatic transaction categorization, customizable charts of accounts, and automated report generation with scheduling options. Make sure the software can integrate with other business software, such as a financial management or enterprise resource planning system.
- Leverage AI-powered data processing: Use artificial intelligence (AI) and machine learning tools—leading software will have these built in—to parse financial documents. These tools automatically extract and confirm information from invoices, contracts, appraisals, and other real estate documents.
- Automate core operational processes: Set up automated workflows for key processes, such as accounts payable and receivable, bank reconciliations, rent collection, and lease tracking.
- Establish data security protocols: Robust security measures are necessary to protect sensitive financial data and maintain compliance with industry regulations. That includes secure data storage, role-based access controls, and detailed audit trails.
- Enable real-time data access: Cloud-based accounting platforms provide team members with current financial information at any time of the day and from wherever they are. This allows them to easily monitor performance and respond quickly when adjustments are needed.
NetSuite: Your Comprehensive Real Estate Financial Reporting Solution
Real estate financial statements offer an informative look back at financial status, but they also support being able to make the right decisions and investments going forward—that is, providing that the information they contain is accurate. Real estate businesses that rely on spreadsheets, manual data entry, or clunky systems that weren’t built for modern-day complexities face the specter of increased chances of errors, delayed reporting, and compromised decision-making.
NetSuite Cloud Accounting Software removes those risks so that real estate company owners and managers can focus on building their businesses, fueled by data, not consumed by it. Embedded with AI, the NetSuite solution automates repetitive tasks, such as recording transactions, collecting data, calculating key metrics, and closing the books, which includes the preparation of financial statements. It also ensures regulatory compliance; helps manage cash flow; tracks assets; processes payments; provides real-time transactional, financial, and operational data; and much more. By providing real-time insights and enhancing accuracy, NetSuite empowers real estate businesses to optimize their performance and drive growth in a competitive market.
Income statements, balance sheets, and cash flow statements provide distinct, yet collective insights into a real estate company’s financial performance and position. Through horizontal, vertical, and ratio analyses—along with industry-specific metrics, such as NOI and cap rates—stakeholders, including executives, business owners, investors, and lenders, can evaluate a business’s financial health and make informed investment decisions. Automating the preparation of these statements helps ensure accuracy and timeliness, allowing companies to respond quickly to market changes while maintaining reliable financial records.
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Real Estate Company Financial Statements FAQs
Are company financial statements public?
In the real estate sector, publicly traded companies that own, operate, or finance income-producing real estate (known as real estate investment trusts, or REITs) are required to disclose their financial statements. Private real estate companies or partnerships usually keep their financials confidential, unless they choose to disclose for strategic reasons.
On which financial statement would you find a company’s owned real estate?
Owned properties show up in the “Assets” section of a company’s balance sheet.
What is a real estate balance sheet?
A balance sheet, whether for a real estate company or any other business, details the entity’s assets, liabilities, and owner equity at a particular point in time. It is one of three core financial statements; the other two are the income statement and cash flow statement.
