Rent Rolls and T12 Statements: Understanding the Differences and Best Practices

The Essential Guide to Rent Rolls and T12 Statements: Understanding the Differences and Best Practices

In real estate, particularly in multifamily or commercial property investments, understanding financial documents is critical for making informed decisions. Two of the most vital documents you’ll encounter are the rent roll and the T12 (Trailing Twelve Months) statement. Each serves a unique purpose and offers different insights into the property’s performance. This article will break down these documents in simple terms, explain their differences, and guide you on how and when to use them effectively, including the importance of reviewing the T12 with a Certified Public Accountant (CPA) during a property transaction.

What is a Rent Roll?

A rent roll is essentially a report that lists all the tenants currently occupying a property, along with details about their leases and payments. Think of it as a snapshot of the property’s rental income at a specific moment in time. Here’s what a typical rent roll includes:

1. Unit Information: The rent roll lists each unit by its number, size (like the number of bedrooms and bathrooms), and other details that may affect its rent.

2. Tenant Details: It includes the names of the tenants, when they moved in, when their lease ends, and how much rent they pay each month.

3. Rental Income: The rent roll shows both the current rent (what each tenant is paying) and, in some cases, the market rent (what similar units are going for in the market).

4. Occupancy Status: This part indicates whether a unit is occupied or vacant. If vacant, it might also show the expected rent once a tenant moves in.

5. Additional Fees: Some rent rolls include extra charges like parking fees, utilities, or other amenities that generate income.

The rent roll is a key document for landlords and property managers because it provides a quick overview of the property’s income. For investors, it’s the first step in analyzing a property’s revenue potential. However, while the rent roll is useful, it doesn’t give the whole picture—this is where the T12 comes into play.

What is a T12 Statement?

The T12, or Trailing Twelve Months statement, is a more detailed financial report that covers the property’s income and expenses over the past 12 months. Unlike the rent roll, which is a static snapshot, the T12 offers a dynamic, comprehensive view of how the property has performed over time. Here’s what a T12 typically includes:

1. Income: The T12 lists all sources of income, not just rent. This can include fees from late payments, parking, laundry facilities, and any other income the property generates.

2. Expenses: This section details the property’s expenses, which are categorized into operating expenses like maintenance, repairs, utilities, management fees, and property taxes.

3. Net Operating Income (NOI): The NOI is calculated by subtracting the total expenses from the total income. It’s a critical figure for determining the property’s profitability.

4. Capital Expenditures (CapEx): Sometimes included in the T12, CapEx refers to large, one-time expenses like roof replacements or major renovations. These aren’t regular operating costs but are important for understanding the property’s overall financial health.

The T12 is essential for investors who need to see how the property performs over time, allowing them to spot trends, identify unusual expenses, and assess the property’s true profitability.

Key Differences Between Rent Rolls and T12 Statements

While both documents are crucial for evaluating a property, they serve different purposes and provide different types of information:

• Time Frame: A rent roll is a snapshot of the property’s current income, whereas a T12 shows financial performance over the past 12 months. The T12 gives you a historical perspective that the rent roll lacks.

• Detail Level: The rent roll focuses on tenant-specific data and current income, while the T12 provides a broader view of all income and expenses, including trends and anomalies.

• Purpose: Rent rolls are primarily used to assess current rental income and occupancy. In contrast, T12 statements are used for in-depth financial analysis and long-term trend identification.

When to Request a T12 Statement

The T12 is most useful when you’re seriously considering a property, particularly when you’re under contract. Here’s why you should request the T12 at this stage:

1. Accurate Evaluation: The T12 helps you understand the property’s historical performance, allowing for a more accurate valuation. It shows whether the property has stable income and manageable expenses or if there are red flags that need attention.

2. Identifying Trends: The T12 reveals trends that a rent roll cannot. For example, it can show seasonal variations in income or expenses, helping you plan for future financial needs.

3. Spotting Anomalies: One of the most important reasons to review a T12 is to spot any unusual financial activity, such as one-off expenses or unexpected income sources. For instance, a large repair cost that appears in the T12 might be a one-time expense that shouldn’t be factored into future operating costs.

Why Involve a CPA in Reviewing the T12?

Given the complexity of the T12, it’s a good idea to involve a CPA when reviewing this document, especially if you’re under contract to purchase the property. Here’s why:

• Verifying Accuracy: A CPA can verify that the T12 is accurate and that income and expenses are correctly categorized. This ensures that you’re getting a true picture of the property’s financial performance.

• Identifying Non-Recurring Expenses: CPAs are skilled at identifying expenses that shouldn’t be included in the calculation of the property’s ongoing operating costs. For example, a significant capital expenditure like a new roof might appear in the T12 but shouldn’t be considered a regular expense.

• Tax Optimization: A CPA can help you understand the tax implications of the T12, including how to maximize deductions and ensure that the financials are aligned with tax regulations.

Practical Example: Using Rent Rolls and T12s in Property Analysis

Let’s consider an example to illustrate how rent rolls and T12s are used in practice. Imagine you’re evaluating a multifamily property with 20 units.

1. Step 1: Review the Rent Roll: Start by looking at the rent roll to understand the property’s current income. Check for occupancy rates, tenant lease terms, and how the current rent compares to market rent. If you see several vacant units, you might need to factor in the cost of marketing and leasing those units.

2. Step 2: Request the T12: Once you’re under contract, request the T12 to dive deeper into the property’s financial history. Look at the income trends—has the rent increased over the past year? Are there any months with significantly lower income? This could indicate seasonal vacancies or issues with rent collection.

3. Step 3: Analyze Expenses: Use the T12 to analyze the property’s expenses. Are the maintenance costs unusually high? This might suggest deferred maintenance or an aging property that will require more repairs. Check for large, one-time expenses that may not recur in the future.

4. Step 4: Involve a CPA: Before finalizing the purchase, have a CPA review the T12. They can help you adjust the numbers for any non-recurring expenses and provide a clearer picture of what your actual operating costs will be.

5. Step 5: Make an Informed Decision: With the rent roll and T12 analysis in hand, you can make a more informed decision about whether the property is a good investment. You’ll have a better understanding of the potential income, the true operating costs, and any financial risks involved.

Common Pitfalls to Avoid

When analyzing rent rolls and T12 statements, there are a few common pitfalls to avoid:

• Overlooking Vacancy Rates: If the rent roll shows several vacant units, be sure to factor in the time and cost required to lease them out. High vacancy rates can significantly impact your income.

• Ignoring Capital Expenditures: Don’t forget to consider capital expenditures that might not appear as regular expenses in the T12. These can be costly and affect your cash flow.

• Failing to Identify Seasonal Trends: Use the T12 to identify seasonal trends in income and expenses. For example, heating costs may be higher in winter, which could affect your cash flow during those months.

• Not Involving a CPA: Always involve a CPA when reviewing a T12. They can catch errors or misclassifications that could lead to costly mistakes.

Conclusion

Understanding the differences between rent rolls and T12 statements is essential for anyone involved in real estate investing. While the rent roll gives you a snapshot of current income, the T12 provides a comprehensive view of the property’s financial performance over the past year. By using these documents together, and with the guidance of a CPA, you can make more informed decisions, avoid common pitfalls, and ultimately ensure that your investment is sound.

Whether you’re a seasoned investor or just getting started, mastering the analysis of rent rolls and T12 statements will give you a significant edge in the real estate market. Always remember to request the T12 when under contract and have it reviewed by a CPA to get the most accurate and insightful view of the property’s financial health.