Episode 48: Understanding Operating Statements and T-12s

Building Passive Income

00:00 / 00:18:23

Welcome to Building Passive Income with CREI Collin.

If the rent roll tells you about income, the operating statement tells you about expenses. Both are critical during due diligence.

In this episode, CREI Collin breaks down how to read operating statements and T-12s. You’ll learn how to calculate Net Operating Income (NOI), understand expense ratios, and identify red flags that could impact your returns.

If you want to evaluate deals with confidence, this episode gives you the framework.

In This Episode, You’ll Learn:

• What an operating statement is and what it includes

• The difference between an operating statement and a T-12

• How to calculate Net Operating Income (NOI) step by step

• What the operating expense ratio is and what is considered normal

• Common operating expense categories explained

• The difference between operating expenses and capital expenditures

• Red flags that indicate underreported expenses or deferred maintenance

• How to verify operating statements with tax returns and bank statements

Key Topics Covered:

[00:00] Introduction – Why operating statements matter

[02:00] What Is an Operating Statement and a T-12?

[03:30] Step-by-Step Operating Statement Review

[05:00] How to Calculate Net Operating Income (NOI)

[06:15] Understanding the Expense Ratio

[07:30] Common Expense Categories

[10:00] Red Flags to Watch For

[11:45] Verifying Financials

[13:00] Example: Calculating NOI

[14:30] Recap and Next Episode

Key Takeaways: Operating Statements and T-12s

Understand What a T-12 Shows

✅ A T-12 shows income and expenses for the trailing twelve months

✅ It provides the most current view of property performance

Know How to Calculate NOI

Net Operating Income (NOI) equals effective income minus operating expenses.

This number does not include debt or capital expenditures.

Watch the Expense Ratio

✅ The operating expense ratio is expenses divided by income

✅ Multifamily properties often fall between 35% and 55%

⚠️ Ratios far outside this range should be reviewed carefully

Expect Property Taxes to Adjust

⚠️ Property taxes often increase after a sale

✅ Always estimate taxes based on your purchase price, not the seller’s current taxes

Separate CapEx from Expenses

❗ Capital expenditures are not included in NOI

✅ Plan for reserves, often in the $250–$500 per unit range depending on the asset

Always Include Property Management

✅ Include a management expense, even if you plan to self-manage

❗ Future buyers will underwrite this cost

Verify with Multiple Sources

Always compare operating statements to:

• Tax returns
• Bank statements
• Historical performance

❗ Any discrepancies should be investigated

Resources Mentioned:

• Operating statement template

• Expense ratio benchmarks

• CapEx reserve guidelines

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Disclaimer:

This podcast is for educational purposes only and does not constitute legal, tax, or investment advice. Always consult qualified professionals before making decisions.