What is a T12 in Real Estate and why Is It Important?

Real estate is one of the most sought-after options for investment purposes. Are you also planning to invest in/buy rental properties? Imagine you’re planning to buy a rental property. The location is great, the unit seems attractive, and you feel that it’ll be a steady source of income.

But before you move ahead, it’s essential to know what income this property has generated in the past year. What are the ongoing costs associated with maintaining the property? That’s where the T12 report/statement in real estate comes into the picture.

Let’s dive deeper into the topic and learn more about T12 statements, who uses T12 statements, what information a T12 report includes, and much more.

What is a T12 Statement In Real Estate?

T12 also known as TTM stands for “Trailing Twelve Months”. The T12 statement is a financial summary of a property over the past 12 months. It typically includes income, expenses, and net operating income (NOI) figures.

Those who plan to invest in real estate, use T12 statements to understand the current financial health and performance of a property before making their investment decisions. It allows the potential buyer or investor to evaluate the property’s profitability and potential for future returns.

Who Uses T12 Statements?

T12 statements explain the financial health of a property and hence it is crucial for various parties involved in real estate transactions.

1. Investors

The main objective of investors in real estate is to earn profit. The T12 statement serves as a valuable piece of information.

1. T12 statement tells about the property’s actual rental income over the past 12 months. This allows the investors to assess the property’s potential for generating consistent returns on their investment.

1. It contains the expense section, where investors can identify the cost-savings areas.

1. Investors can compare the T12 income data with similar properties in the area to understand how the subject property stacks up in terms of rental income generation.

1. A thorough analysis of the T12 report helps investors evaluate the overall risk associated with the investment.

2. Sellers

For property sellers, a T12 statement can be a valuable asset.

1. T12 contains the property income history. By showcasing T12 statements, sellers can justify their asking price and demonstrate the property’s potential for continued profitability.

2. T12 statements help in negotiating property prices with confidence. They can use the data to back up their claims.

3. Buyers

For potential buyers considering a rental property, a T12 report is essential for making informed decisions.

1. Financial Stability Assessment: The T12 report allows buyers to assess the property’s financial stability. Analyzing income and expenses helps them understand the property’s ability to generate enough income to cover ongoing costs and potentially yield a profit.

2. Budgeting for Operating Costs: By reviewing the expense breakdown in the T12 report, buyers can estimate the ongoing operational costs associated with owning the property. This helps them factor in these costs when determining their overall budget for the investment.

3. Identifying Potential Issues: High vacancy rates or unexpectedly high expenses in the T12 report can signal potential problems with the property. This allows buyers to identify potential red flags and make informed decisions about proceeding with the purchase.

4. Lenders

Before approving a loan for a property purchase, lenders rely on various factors to assess the risk involved. T12 reports play a crucial role in this process.

1. Loan Eligibility: The historical income data in the T12 report helps lenders determine if the property generates enough income to cover the loan payments. This information is crucial for determining the borrower’s eligibility for the loan.

2. Loan-to-Value Ratio (LTV): Lenders use the property’s value and the income it generates to calculate the LTV ratio. A healthy income stream reflected in the T12 report can influence the lender to offer a more favourable loan with a lower down payment requirement.

Know how to calculate T12 for your real estate property.

What Information Does a T12 Statement Include?

A T12 statement comprises two main sections:

1. Income: This section includes all rental income received from tenants over the past year. It might include details like base rent, late fees, and any other income sources generated by the property.

2. Expenses: This section includes a list of operational costs associated with maintaining the property. This includes property taxes, insurance premiums, repairs and maintenance costs, utilities, property management fees, and more.
   
   
3. Net Operating Income (NOI): NOI is calculated after subtracting operating expenses from the total income. It represents the property’s profitability before accounting for debt service and other financing costs.

Benefits of Using T12 Statements

T12 statements offer valuable insights to make informed decisions.

1. Clear Financial Picture: It provides a comprehensive overview of a property’s financial performance. This in return helps in understanding the property’s earning potential and ongoing costs.

2. Informed Decisions: By analyzing the T12 report, buyers, sellers, and investors can make smarter choices about buying, selling, or investing in a property.
   
   
3. Cost Savings and Profit Improvement: T12 statements help in identifying the areas with high expenses and plan strategies to save costs and improve the property’s overall profitability.

Limitations of T12 Statements

It’s important to remember that T12 statements are a historical record and reflect the property’s performance over the past year. They may not necessarily predict future trends or account for unexpected expenses that might arise.

How to Obtain a T12 Statement?

T12 statements are usually generated by property owners or property management companies. If you’re planning to buy a property, the seller should provide the T12 report during the due diligence process.

Conclusion

Investing in real estate might seem an overwhelming decision, but T12 statements help real estate investors, sellers, and buyers understand the most critical part of the process– the finances of the property. T12 empowers you to make informed decisions while investing in a property.

Do you want to know how to calculate T12 for your real estate property? Click here.