By Unit Income Statement
A little while ago I talked about the differences between the statement of rental income and the cash flow statement and how the first one is used to report taxable income to the Canada Revenue Agency while the second one is useful for analyzing and planning. Today I’d like to talk about the By Unit Income Statement.
The By Unit Income Statement is exactly the same as the cash flow statement we discussed earlier except that the income and expenses are broken down by each unit in the property. The reason we do this is to measure the performance of each unit so that we can which ones are being utilized to maximize profit and which ones are under performing.
This works best with properties with fewer units, because it would get more complicated trying to do this with a property with hundreds of units. You could break the property down into segments of similar units, such as number of bedrooms, etc.
Break It Up
Assuming you have already produced your statement of cash flows, creating the by unit income statement is pretty easy. Create a column for each unit and list the income and expenses for each unit. Some expenses, like electricity if each unit has their own meter, will belong to specific units, but other expenses, like property taxes and debt payments, will apply to the building as a whole. For these expenses, I allocate them to each unit by using a weighted average based on income.
Some of you might be wondering what the heck a weighted average is or how you find it. Luckily, I know the answer. The weighted average takes into account the proportion of each unit. Let’s say your property has three units and the rents are as follows:
- Unit 1 – $600 – 30%
- Unit 2 – $600 – 30%
- Unit 3 – $800 – 40%
- Total – $2000 – 100%
If your debt payment is $700, then you would allocate that expense using the above portions:
- Unit 1 – 30% – $210
- Unit 2 – 30% – $210
- Unit 3 – 40% – $280
- Total – 100% – $700
If you just divided the $700 expense by the number of units, then you would have allocated $245 to each unit making Units 1 and 2 looking worse than they were and Unit 3 looking better.
Knowledge Is Power
Once you have all income and expenses allocated to the correct units, you will be able to see at a glance how each unit in your property is doing. This knowledge will help you with a multitude decisions from rent increases to major upgrades and will point out where you need to focus your property management efforts.