EP303: Understanding a Profit & Loss (In a Few Minutes)

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If you’re in real estate (or thinking about it), there’s one financial document you can’t afford to ignore: the Profit & Loss statement (P&L).

This little sheet of numbers?

It’s the ultimate truth teller.

It reveals whether a property is a goldmine or a financial disaster waiting to happen.

And yet—most investors?

They overcomplicate it.

They get lost in the numbers and miss the real story hiding between the lines.

But once you know what to look for, you’ll never see a P&L the same way again.

🚩 You’ll spot hidden risks.
🚩 You’ll avoid overpriced properties.
🚩 You’ll stop falling for misleading financials.

Let’s break it down.

Step 1: What Is a P&L (And Why Should You Care)?

Imagine you run a lemonade stand.
Your P&L is your money report—it tells you:

🍋 How much you made from selling lemonade
🍋 How much you spent on lemons, sugar, and cups
🍋 Whether you made a profit or just wasted your summer

A rental property’s P&L works the exact same way.

💰 It shows how much income the property brings in.
💰 It shows how much money is spent running it.
💰 And at the end of the day? It tells you whether you’re making money or losing it.

So why does this matter?

✅ If you’re running the property, it tells you if you’re profitable or bleeding cash.
✅ If you’re investing, it helps you separate a great deal from a bad one.

💡 Key Lesson: Never trust a seller’s pitch. Look at the numbers.

Step 2: The #1 Mistake Investors Make (And How to Avoid It)

Most investors? They only look at the numbers.

Smart investors? They ask how those numbers are calculated.

See, there are two ways to report income & expenses:

Option 1: Cash Basis

💵 Only counts money when it’s actually collected or paid
💵 Hides unpaid bills and overdue rent

Option 2: Accrual Basis

📊 Counts income when it’s earned, even if it hasn’t been paid yet
📊 Includes upcoming expenses before they’re actually paid

So What’s the Right Way to Read a P&L?

✅ Always ask for:

✔️ Income on a cash basis (so you know how much rent was actually collected)
✔️ Expenses on an accrual basis (so you see the full picture—including unpaid bills)

🚨 Why does this matter?

If income is on an accrual basis, it might look great on paper—but in reality, tenants might not be paying their rent!
If expenses are on a cash basis, it might look super profitable—but the owner might just be delaying big bills.

💡 Key Lesson: Numbers don’t lie—but they can be manipulated. Always check how they’re reported.

Step 3: Breaking Down the P&L (What Actually Matters)

A P&L isn’t just a list of numbers. It tells a story.

It’s like reading The Matrix—once you know what to look for, you see things other investors miss.

🔍 First, Look at the Income Section (Money Coming In)

📌 Market Rent: The ideal rent if every unit was rented at full price.
📌 Loss to Lease: The difference between market rent and what tenants actually pay.
📌 Vacancy Loss: Money lost from empty units.
📌 Other Income: Things like pet rent, parking fees, or late fees.

💡 Red Flag: If loss to lease is too high, it means rents aren’t keeping up with market rates.

🔍 Next, Look at the Expenses (Money Going Out)

📌 Property Taxes – Check for upcoming reassessments.
📌 Insurance – Rising costs can kill cash flow.
📌 Payroll – On-site staff costs can vary widely.
📌 Marketing Costs – Are they spending too much just to keep it occupied?
📌 Contract Services – Landscaping, pest control, security—are they overpaying?
📌 Repairs & Maintenance – If it looks too low, they might be hiding big upcoming repairs.

💡 Rule of Thumb: Total expenses should be around 50% of income. If it’s way lower, dig deeper.

🔍 Net Operating Income (NOI) – The Most Important Number

📌 Formula: NOI = Total Revenue – Operating Expenses
📌 Why is this critical?
✅ Determines how much the property is actually worth
✅ Small increases in NOI massively boost value

💡 Example:

Take out your 🧮 calculator…

A $100K increase in NOI at a 5% cap rate increases the property’s value by $2M.

YES, $2 million!

🔍 The “Below-the-Line” Items That Can Make or Break Your Deal

These DON’T show up in NOI—but they 100% affect cash flow.

📌 CapEx (Capital Expenditures) – Big, one-time costs (new roof, HVAC, renovations).
📌 Debt Service – Loan principal + interest (your mortgage payment).
📌 Owner Distributions – Money paid out to investors.

🚩 Red Flags:
❌ High NOI but big hidden CapEx costs? 🚨 That’s a problem.
❌ High NOI but huge debt payments? 🚨 You might not see any actual cash flow.

💡 Key Lesson: Just because a property has a high NOI doesn’t mean it’s a great investment.

Step 4: Case Study – What a Real P&L Tells Us

Let’s break down a real deal:

📌 236-unit property

🚩 Payroll & Benefits – $2,080 per unit (Industry Benchmark: $1,200–$1,800)

🔎 Red Flag: Overstaffed? Third-party contractors mixed in?

🚩 Operating Expenses – 55% of Income (Industry Benchmark: 50-66%)

✅ Within range, but leaning high—any unusual spikes?

🚩 Repairs & Maintenance – $268 per unit (Industry Benchmark: $300–$600)

🚨 Too low! Are they delaying repairs to make the P&L look better?

🚩 Contract Services – $635 per unit (Industry Benchmark: $500–$1,000)

✅ Within normal range, but are they locked into expensive contracts?

🚩 Marketing & Advertising – $794 per unit (Industry Benchmark: $300–$700)

🚨 Too high! Is the property struggling to attract tenants?

Final Warnings & Red Flags to Watch For

🚩 Manipulated Financials – Some sellers inflate income & hide expenses.
🚩 Unrealistically Low Expenses – Payroll or repairs seem too low? Expect a spike after purchase.
🚩 Mom-and-Pop Accounting – Small landlords don’t track expenses well, leading to bad data.

💡 Solution?
✅ Compare the P&L to market norms
✅ Ask brokers or property managers for insight
✅ Review rent rolls & management reports

🚨 If the numbers don’t add up… WALK AWAY.

Final Thoughts: Learn to Read a P&L, Make Millions

I’ve seen so many deals where a simple mistake in reading a P&L cost investors millions.

But once you master this skill?

You’ll never get tricked again.

👉 Want to go deeper?

Join our Wealth Beyond Me Community—where we break down real deals, share investor insights, and give you the tools to invest with confidence.

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