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How does one verify, audit, and analyze a cash-flowing producing commercial real estate asset? One of the necessary items needed in that process is the financials which is also referred to as a financial statement, income statements, cash flow statements or a P & L. Being able to digest all the line items in a real estate financial statement will help you understand what’s happening under the hood financially and to get an idea of how they arrive at their current net operating income.
In this article, we’ll breakdown down what is T-3 in real estate and what is T-12 in real estate.
Key Takeaways
- A T-3 in real estate is an abbreviation for the “trailing 3-month” financial statements for a particular property.
- A T-12 in real estate investing refers to the “trailing 12-month” financials of a real estate property.
- When investors refer to a T-12 for a real estate investment, there essentially asking to see a profit and loss statement of all the property’s income and expenses for a set period.
What is T3 in Real Estate?
A T-3 in real estate is an abbreviation for the “trailing 3-month” financial statements for a particular property. These financial statements will look back at all the income and expenses at the property over the last three months. Investors like this look at a T-3 to see more current numbers for the property.
Investors will also give more weight to the earnings of the trailing three months as rents generally rise yearly. Next, we’ll showcase an example of what a T-3 looks like.
T3 Example
Below is an example of real estate T-3 for an apartment complex.
What is a T12 in Real Estate?
A T-12 in real estate investing refers to the “trailing 12-month” financials of a real estate property. This is reflected in a financial statement showcasing the previous 12 months’ income and expenses at a particular property.
The T-12 is the most common financial statement real estate investors, and prospective lenders will ask to review before acquiring or recapitalizing a property. Next, we’ll break down an example of a T-12. Lenders reviewing a deal typically also request the letter of intent at the same time as the T-12, so both documents arrive together during underwriting.
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T12 Example
Below is an example of real estate T-12 for an apartment complex.
The Difference Between T12 and P&L
A T-12 and a P&L which is short for a “profit and loss statement,” is the same thing. When investors refer to a T-12 for a real estate investment, there essentially asking to see a profit and loss statement of all the property’s income and expenses for a set period. The T-12 refers to the set period of the trailing 12 months. The income side of that statement is directly tied to how occupancy is calculated and reported on-site each month.
Why the T3 and T12 are so Important
The T3 and T12 financials are crucial for real estate investors. The following are some of the ways these reports are essential:
- Showcasing the asset’s current and past performance: These financial statements will broadcast all the operating income and operating expenses to see how the property has performed to better understand what kind of debt it can support and its current market value. Processing this financial data will help you understand and make more informed decisions.
- Showcase where the property is trending: With the present and past numbers taken into account, a real estate investor can use this to make an educated forward-looking projection for the property’s financial performance.
- Showcase where improvements can be made: By diving into each line item, you can identify things that can be improved. Things such as certain expense items that you can reduce by getting better vendors or maybe by charging back utilities to tenants to offset the expenses to you, the landlord, for example.
- How the T-3 and T-12 are used in tandem: Some investors use the T-3 and T-12 in tandem when analyzing a real estate investment opportunity’s current value by using the T-3’s income figures and the T-12’s expenses figures to underwrite its current value.
Frequently Asked Questions About What is a T-3 in Real Estate
What does a T12 include?›
A T12 includes all the income and expenses figures related to the subject real estate investment over the last 12 months of operation.
What is another name for a T12 report?›
There are several interchangeable names for a T12 report, the most common would be a “TTM”.
What are T12 expenses?›
T12 expenses are the expense listed on a trailing 12-month financial statement. In a real estate T-12, you might see expense items such as real estate taxes, insurance, utilities, payroll and repairs, and maintenance, to name a few.
T-3 & T-12 in Real Estate Investing - Conclusion
The trailing 3 months and 12 months of a real estate investment give an investor an almost complete snapshot of the property’s performance without having an updated rent roll. It also helps investors identify expenses that can be offset, lowered, consolidated or even other income items that can be improved after a close financial analysis.
Sources
- Fannie Mae — Small Loans — Multifamily Financing Options
- Freddie Mac — Multifamily Loan Term Sheets — Financing Products
- IRS — Publication 527, Residential Rental Property
- IRS — Topic No. 414, Rental Income and Expenses
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Daniel Di Cerbo
Daniel is the Co-Founder and Principal of Willowdale Equity, a private real estate investment firm specializing in Class B & C value-add multifamily assets across the Southeastern U.S. He has been a sponsor on over $150M of multifamily acquisitions across Georgia and Texas.
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