Cash Flow vs. Profit: Understanding What Your Properties Actually Make

The Number That Misleads Every New Landlord 

"I'm making $500 a month per property." Every new landlord says some version of this. They take the rent, subtract the mortgage payment, and call the difference profit. 

It's not profit. It's cash flow — and cash flow and profit are different things, measured differently, and important for different reasons. 

Understanding the distinction is the difference between knowing how your portfolio is performing and fooling yourself into thinking it's performing better (or worse) than it actually is. 

Cash Flow: What Hits Your Bank Account 

Cash flow is the actual money coming in minus the actual money going out in a given period. It's what you see in your bank account. 

For a rental property, monthly cash flow typically looks like this: 

Rent received: $1,800. Minus mortgage payment (principal and interest): $1,200. Minus property tax escrow: $250. Minus insurance escrow: $100. Minus average monthly maintenance: $150. Minus vacancy reserve (8% of rent): $144. Minus management/software costs: $10.

Net monthly cash flow: -$54. 

Wait — that's negative? For many properties, especially those purchased in the last few years at higher interest rates, monthly cash flow is break-even or slightly negative after accounting for all real expenses. This alarms new landlords who expected the rent check to generate immediate profit. 

But cash flow isn't the whole picture. 

Profit: The Full Financial Reality 

Profit includes factors that don't show up in your monthly bank balance but significantly affect your actual wealth. 

Principal paydown

‍Of that $1,200 mortgage payment, a portion goes to interest (deductible) and a portion goes to principal (not deductible, but it's building equity). In the early years of a 30-year mortgage, principal paydown might be $200-$300 per month. That's not cash in your pocket, but it is wealth accumulation — your tenant is paying down your mortgage. 

Appreciation

‍If the property appreciates at 3% annually on a $300,000 value, that's $9,000 per year or $750 per month in equity growth. It's unrealized — you can't spend it — but it's real wealth. 

Tax benefits

‍The depreciation deduction alone ($8,182/year on a $225,000 depreciable basis) provides tax savings of approximately $2,000/year at a 24% marginal rate. Combined with mortgage interest deductions, property tax deductions, and expense deductions, the tax benefits of rental ownership often mean your actual after-tax return is significantly better than your cash flow suggests. 

When you add principal paydown, appreciation, and tax benefits to the cash flow calculation, that property that appeared to be losing $54/month might actually be generating $800-$1,200/month in total return. 

Why Both Numbers Matter 

Cash flow tells you whether the property is sustainable. Can you cover all expenses without reaching into your personal savings every month? If cash flow is consistently negative and you don't have reserves to cover the shortfall, you have a problem that no amount of appreciation or tax benefits can solve in the short term. 

Profit (total return) tells you whether the investment is worthwhile. A property with break-even cash flow but strong appreciation, principal paydown, and tax benefits is a good investment — you're just building wealth in ways that don't show up in your checking account this month. 

The danger is focusing on only one number. Landlords who only look at cash flow may sell a property that's building significant wealth through appreciation and tax benefits. Landlords who only focus on long-term returns may ignore cash flow problems that create real financial stress. 

Calculating Your Real Returns 

For each property in your portfolio, calculate:

• ‍Annual cash flow. Total rent collected minus total cash expenses (mortgage, taxes, insurance, maintenance, management, vacancy). This is your liquidity number. 
• ‍Annual total return. Cash flow plus principal paydown plus estimated appreciation plus tax savings. This is your wealth-building number. 
• ‍Cash-on-cash return. Annual cash flow divided by total cash invested (down payment, closing costs, initial repairs). This tells you what your actual cash investment is earning. 
• ‍Total return on investment. Annual total return divided by total cash invested. This is the comprehensive performance metric. 

A property that generates 2% cash-on-cash return but 12% total ROI is a strong investment — you're just capturing most of the return through equity and tax benefits rather than monthly cash flow. 

Portfolio-Level Analysis 

Individual property analysis is important, but portfolio-level thinking is where strategic decisions happen. 

Which properties generate the strongest cash flow? Those are your stability anchors. Which generate the strongest total return? Those are your wealth builders. Are any properties negative on both cash flow and total return? Those might be candidates for sale or repositioning. 

When you can see both cash flow and profit at the portfolio level, you make better decisions about which properties to keep, which to improve, which to sell, and where to invest next.