How To Use Schedule Gross Rental Income

The use of schedule gross rental income can come into play when you're in the market to purchase investment property. The seller of an investment property could use it as a "misleading criteria" for establishing an inflated sales price of the property. Lets see what you'll need to be on the lookout for in order to make a good purchase at a realistic and fair price.

When investment property is sold, a profit and loss (P & L) statement for the property should be furnished by the seller for your review. This is where your "detective work" must begin by examining and verifying all the information (income and expenses) supplied on the property's P & L statement. You'll literally have to "separate fact from fiction" here.

Verify the Profit and Loss Statement's Income

In an effort to inflate the sales price of their investment property, a dishonest seller and/or broker will deliberately mislead buyers with false information about the cash flow of their property. They'll do this by inflating the property's rental income or they'll decrease its operating expenses (or both). For increasing the property's income, they'll use the schedule gross income of the property on the income statement.

The schedule gross income is a false and misleading indicator of an investment property's actual rental income because it doesn't factor in any vacancy or uncollected rents (collection losses). The schedule gross rental income is what the investment property should produce if it were 100% occupied, 100% of the time, and all tenants paid their rent when due.

It's a fact of life, however, that vacancies do occur and some tenants, for one reason or another, suffer hardships and default on paying rent. These occurrences naturally decrease the rental income produced by the property.

To account for these events that can take place in the rental property business, the schedule gross rental income should be lowered by 5 - 10%, which is normal for residential investment property. The lower rate corresponds to properties that are in good condition, located in desirable areas, and the local economy is stable.

On the other hand, the higher percentage rate corresponds to properties that are not as well maintained, are located in less desirable areas, or the local economy is not strong. In extreme cases, this rate could be even higher.

So, when making an offer on an investment property, base your offer on income that represents reality. You'll be glad you did because in the end, it's reality that affects the actual profitability of your investment, not theory.

For more information on schedule gross income, please visit The Landlord's Library book collection. It contains everything you need on the complete subject of residential landlording.

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Investment Property Cash Flow Analysis