DoorWalkHow to read a T-12 operating statement
A T-12 is a property's income and expenses for the last twelve months, month by month. Read the income first, then the expenses, then adjust for one-time items and for costs the seller did not book. What is left is the net operating income you can price an offer from.
What a T-12 is
T-12 stands for trailing twelve months. It is the seller's own statement of what the property took in and paid out in each of the last twelve months. A buyer, a lender and an appraiser all start from it, so ask for it with the rent roll.
It is the seller's document, not yours. Some lines are exact and some are the seller's choice of where to put a cost. Your job is to read it as the seller would like it read, then as it really is.
Read the income lines
- Gross potential rent: every unit rented at its full lease rate for the whole year.
- Vacancy and loss to lease: rent not collected because units sat empty, or rent below what the lease says.
- Concessions and bad debt: free rent given and rent never paid.
- Other income: laundry, parking, pet fees, late fees and utility charges billed back to residents.
Look at the months, not only the total. A good year with one bad quarter tells a different story from an even one. Rising vacancy in the last months is a warning even when the year looks fine.
Read the expense lines
- Property taxes. Ask what the county will assess you after the sale.
- Insurance. Ask for the current policy and the claims history.
- Utilities: water, trash, common electric and gas, net of what residents pay back.
- Repairs and maintenance: the ordinary upkeep of the property.
- Payroll for the on-site team.
- Management fee.
A line that is far below the others you have seen, or a line that is missing, is a question. Seller-managed properties often show no management fee at all.
Also check that the months are all there. A T-12 with a missing month, or one that changes shape halfway through, may have been assembled by hand. Ask for the monthly statements or the bank deposits behind it. A seller with good records will send them.
The usual seller adjustments
Three adjustments come up on most T-12s.
- Take out one-time income, such as an insurance reimbursement or a one-off fee. It will not come again.
- Move capital work out of repairs and maintenance. A new roof is not a yearly upkeep cost. Budget for it in the renovation plan instead.
- Add costs the seller did not book, most often a market management fee.
Example a made-up 40 unit property. The seller's T-12 shows $465,000 of income (including a $9,000 insurance reimbursement) and $181,000 of expenses (including $30,000 of repairs, of which $12,000 was a roof repair, and no management fee). The seller's net operating income is $465,000 minus $181,000, or $284,000.
| Line | Seller's T-12 | Adjusted |
|---|---|---|
| Income | $465,000 | $456,000 |
| Repairs and maintenance | $30,000 | $18,000 |
| Management, 4% of income | $0 | $18,240 |
| Other expenses (taxes, insurance, utilities, payroll) | $151,000 | $151,000 |
| Total expenses | $181,000 | $187,240 |
| Net operating income | $284,000 | $268,760 |
The adjusted number is $15,240 lower: $9,000 less income, $18,240 more management, and $12,000 less repairs. At a made-up 7% capitalization rate, $284,000 is a value of $4,057,143 and $268,760 is $3,839,429. The seller's version is worth $217,714 more on paper. That is the gap you negotiate over.
Tie it to the rent roll
The T-12 and the rent roll describe the same units, so they must agree. Multiply the rent roll's monthly rents by twelve and compare with gross potential rent. Compare the units the rent roll shows as vacant with the vacancy line. If rent collected on the T-12 is higher than the rent roll can produce, ask why before you go further. How to analyze a rent roll covers the other half.
How DoorWalk uses it
On the property's Documents screen you can add the seller's rent roll, last 12 months' books and tax bill. DoorWalk offers the numbers printed plainly in a document for you to confirm, marks the ones it worked out, and never uses the seller's claims as your numbers. The deal model then runs on the numbers you confirmed. Read how to find your maximum offer for the next step.
Questions
- What does T-12 mean in real estate?
- T-12 means trailing twelve months: a statement of a property's income and expenses for the last twelve months, by month. Buyers and lenders use it to work out net operating income.
- What is net operating income?
- Net operating income is income minus operating expenses. It leaves out the loan payment, income tax and capital work such as a new roof.
- What should I check first on a T-12?
- Check the income against the rent roll, then look for one-time income, capital work booked as repairs and a missing management fee. Those three change net operating income most often.
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