An income-and-expense statement for real estate commonly used by investors as a guide to evaluate rental property performance is the annual property operating data, or APOD.
In this article, we’ll look at the APOD and consider what it may reveal about a property, how it’s constructed, its strengths and weaknesses, and when it is best used during the profitability analysis of investment real estate.
To begin with, understand that just as the name annual property operating data implies, all the financial data on an APOD are annualized. So when we refer to the income, expenses, mortgage payment and cash flow, we are speaking about an annual amount.
What the Statement Reveals
The popularity of an APOD lies in fact that it gives an analyst a good first-glance at a property because it projects the income and expenses out just twelve months. So it acts somewhat like a “snap shot” of the property’s financial performance. When you look at the statement you see a rental property’s income, operating expenses, debt service (mortgage payment), and cash flow instantly.
Of course, all this financial data is assumed (it may or may not be the true story), but we’ll cover that later.
How to Construct
An annual property operating data statement, unlike other income-and-expense statements commonly associated with investment real estate analysis, is that it is generally constructed on one page.
It will show the gross scheduled income (income generated from rents at 100% occupancy), vacancy allowance (loss due to vacancy), other income (such as income generated from coin-operated laundry facilities), operating expenses (itemized and total), debt service, and cash flow without having to sort through two or three pages.
The data’s objective is straightforward: income less operating expenses less mortgage payment equals cash flow.
Pros and Cons
As stated, one of the essential advantages of an APOD is that it can tell you quickly and comprehensibly what cash flow an income property might generate after the first year of ownership.
On the other hand, it doesn’t include any elements of tax shelter. It will not show you what cash flow you might expect to receive after you pay taxes, or what your tax benefit or loss might be due to owning the property. An annual operating property data statement simply does not calculate for, or reveal tax issues.
The APOD also does not account for the time value of money. There are no calculations for either compounding or discounting; the cash flow it assumes in twelve months simply represents what a dollar is worth today, not how much less it might be worth next year perhaps after inflation.
Garbage in Garbage Out
Naturally, not unlike any report being used to evaluate the financial performance of investment real estate, an APOD is only as good as its data. The income, expense, and mortgage figures must be accurate (or at least reasonable) for the cash flow to be accurate and/or reasonable.
As a result, no prudent real estate investor would ever base an investment decision solely upon an annual property operating statement and, in fact, would undoubtedly have more questions about the property after looking at the report than satisfactory answers. But this is what any preliminary information about an investment property is intended to do anyway, so this is a good thing.
Okay, so when is the best time to present an APOD to a potential buyer? Include it in your initial presentation. As stated, it might not influence a buying decision (and shouldn’t), but if done correctly, this one-page income-and-expense statement can arouse a buyer to continue to evaluate at what price and on what terms a rental property will make sense as an investment. And that’s a good thing.