Uh Hello, Don’t Forget to Calculate the Profit on an Investment!

by | BiggerPockets.com

Shut up, I’m not even kidding.

Do you know how many people approach me and ask me what I think of a particular deal? Mind you, I’m a very open-minded person. Even if a deal isn’t one I would necessarily pursue personally, either for interest or niche reasons, I’m always open and eager to hear about deals other people find. I’m especially excited if a deal seems really good and the person goes after it (I get really excited for people going after killer deals — and even more if they actually get them!).


Of all those people who approach me wanting to hear my opinion on deals, do you know how many have absolutely zero clue what the anticipated profit on the property will be? Uhhhhh, hello! What do you think we are in this biz for? Profit. Don’t you want to know what your profit on a property will be?

Related: How to Really Calculate Cash Flow on Your Next Rental Property

More logistically, how are you (or me) supposed to know if a deal is a good one if you have no idea what the profit is scheduled to be?

I have three case studies to help show my point. In each case, figure out what information is missing in order to determine if it’s a good deal or not. Not only look for the missing information, but also look for red flags in each deal.

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Case #1

Investment opportunity:

Single-family home, Orange County, CA

$270,000 asking

  • Not a full fixer-upper, but needs extensive updating and cosmetic work
  • Income: $1200/month
  • Expenses (property taxes, insurance, repairs): Unknown


  • It’s Orange County, CA. Enough said. Amazing place to own anything (assuming you can afford it)!
  • Potential for appreciation in Southern California is high.


  • No profit! None of the expenses associated with this property are known. But in this case, the taxes, insurance and repairs don’t have to be known to already know you will lose money on this property. The mortgage payment on this property alone is likely to be right at the rental income or higher depending on the terms. Boom, negative cash flow.

What if you pay all cash for the property, you ask. Well, then calculate the cap rate on that. Taking into account NO expenses, you will be looking at a 5% cap rate. But no expenses isn’t realistic at all. You will have to pay taxes, insurance, repairs and vacancy. And this house needs extensive updating to even make it rentable. All of that will no doubt put you in the red on this property.

Red Flags:

  • It just flat won’t profit. No questions asked.

Case #2

Investment opportunity:

Duplex, Hollywood, FL

$190,000 asking

$183,000 accepted offer

  • Units: 2/2 downstairs (older, not remodeled), 2/1 upstairs (fully remodeled)
  • Income: Downstairs $1000/month, upstairs $1250/month
  • Expenses (property taxes, insurance, repairs): Unknown
  • Notes from buyer: Seems to be some deferred maintenance, possible roof leak, wood frame building, downstairs unit not in great shape, very old, and has an odd flow.


  • Duplex! Excellent! Duplexes are great investments.
  • Amazing location. Hollywood, FL is great, lots of industry, it’s a “sexy market,” lots of planned development.
  • At first glance, the numbers beat the 1% rule at least, which is pretty impressive for an area like Hollywood.


  • Unknown profit! None of the expenses associated with this property are known. And more than a lot of areas, the expenses for a property in this area could be very severe. Property taxes in Florida are typically very high. Insurance is usually high in Florida because of hurricanes; Hollywood is in primo hurricane territory AND the house is made out of wood. Wood + hurricanes = high insurance, I would assume!

It is already known there is “deferred maintenance,” an old and low-quality lower unit, and a possibly leaky roof. How much money is all of this going to cost the buyer? It could be very low — or it could be upwards of tens of thousands of dollars.

Red Flags:

  • Taxes and insurance expenses in Florida should be a red flag in themselves.
  • The property was listed earlier this year for $295,000 and has seen six price drops since then, and it’s still not sold.
  • Within 0.5 miles of this property, there are 10 single-family homes listed between $160,000-$320,000. If you would have to pay that much for a single-family home, how in the world is a duplex listed at $190,000? Those aren’t big single-family homes either, they are max two bedrooms.

Case #3

Investment opportunity:

Five single-family homes, Houston, TX

$320,000 (for the package of all five)

  • All houses located in a golf course community
  • Income: $4200/month total between all five houses
  • Expenses (property taxes, insurance, repairs): Unknown
  • Notes from buyer: Supposedly a turnkey purchase, little to no maintenance required


  • The numbers easily beat the 1% rule
  • Very affordable asking price for five houses in Houston ($64,000/house)
  • Houston is a well-known investor haven right now. Great macro-market!
  • Golf course, hello! Golf courses typically add a notch of flare to any property quality


  • Unknown profit! None of the expenses associated with this property are known. Two major expenses regarding these houses, both of which could very quickly knock any cash flow out of the water: property taxes and HOA fees. Property taxes in Texas are typically very high, but oftentimes they are still doable so those may not prove to be a deal breaker (but should still be looked at for sure), but where the big one here is: potential HOA fees!

A golf course community? Oh boy, could the HOA fees be out of control. Those could easily blow the cash flow out of the water. Those are the two expenses that seriously need to be looked at, and then of course still calculate the insurance cost because insurance in Texas isn’t known to be overly cheap for insurance.

Red Flags:

  • Single-family houses in Houston on a golf course…that cheap? Houston is such a popular market right now that I can’t imagine good houses being priced that low, especially ones in a golf course community. It is possible, I suppose, if a developer bought them in bulk very cheap and fixed them up and can then resell cheap but you better really confirm that is the case. Otherwise, the price is a huge red flag.

The point is, just owning a property isn’t necessarily profitable. I think most of us grew up thinking that as long as we own property, we are financially smart. I thought that up until the point I started looking into buying rental properties. For the longest time I couldn’t figure out where the “supposed” profit was (because I was looking in Southern Cali) that everyone assume automatically came with owning rental properties.

Related: Calculate Yield: Comparing Your Buy-and-Hold Investment Options

It wasn’t until I got deeper into real estate that I learned that most properties actually don’t profit. Then I learned how to really calculate rental property profits. The key lies in subtracting all of the expenses of the property (taxes, insurance, management, repairs and vacancy) from the income. If you are financing, take out that mortgage too.

For an easy method of calculating rental property numbers, check out Rental Property Numbers so Easy You Can Calculate Them on a Napkin

Maybe one or more of these three properties presented will in fact produce profit. But there should be a lot of research into each one before anyone goes for them, that’s for sure!


Anytime you are looking at potential rental properties for investment, make sure you understand how to know if the property is actually projected to produce a profit. If you don’t know how to figure that out, or you don’t know the expenses associated with the property, don’t move forward until you do!

Don’t ever estimate expenses either. The only ones you should be estimating or on-going repairs (which doesn’t include initial repairs or deferred maintenance!) and vacancies. Otherwise, know all the numbers. Taxes, insurance, initial repairs…get all of those.

The only time this advice doesn’t apply is if you are blatantly buying for emotional reasons or because you are speculating on appreciation. In those cases, you’re on your own.

What are misconceptions you always had about real estate investing that you have now realized aren’t true since getting into real estate investing?

Let us know in the comments!

About Author

Ali Boone

Ali Boone is a lifestyle entrepreneur, business consultant, and real estate investor. Ali left her corporate job as an Aerospace Engineer to follow her passion for being her own boss and creating true lifestyle design. She did this through real estate investing, using primarily creative financing to purchase five properties in her first 18 months of investing. Ali’s real estate portfolio started with pre-construction investments in Nicaragua and then moved towards turnkey rental properties in various markets throughout the U.S. With this success, she went on to create her company Hipster Investments, which focuses on turnkey rental properties and offers hands-on support for new investors and those going through the investing process. She’s written nearly 200 articles for BiggerPockets and has been featured in Fox Business, The Motley Fool, and Personal Real Estate Investor Magazine. She still owns her first turnkey rental properties and is a co-owner and the landlord of property local to her in Venice Beach.


  1. Ali Boone, once again you are confusing initial cash flow with profit. And again you are exhibiting your ignorance of cap rates! First, if you could actually get a cap rate comp on a SFR then wouldn’t you profit by buying at 5% if the market comps were 1%? Geez, you are leading investors down the garden path to ruin.

    • Brandon Turner

      Bob – maybe I can jump into this argument a bit.

      According to http://en.wikipedia.org/wiki/Capitalization_rate – the Cap Rate is “the ratio between the net operating income produced by an asset and its capital cost (the original price paid to buy the asset) or alternatively its current market value.”

      So my question to you is this: which part of Ali’s post is confusing you? Because either you are saying that the house is not an asset or it doesn’t have a current market value. It seems to me both those things are true, are they not? So if Ali wants to use Cap Rate, why not?

      Yes, Cap Rates are primarily used in commercial, but so are filing cabinets – does that mean you can’t have one in your house?


      Understand that the definition you use and control a conversation about doesn’t mean another person is wrong or misleading. What am I misunderstanding?

      Furthermore, let’s talk about Profit: Investopedia defined profit as: “A financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity”

      So again I ask: when Ali uses “cash flow” and “profit” interchangeably, from a logic standpoint, which part of that definition do you have a problem with? Cause my cash flow, at the end of the day, IS the revenue I have gained from my business activity after all the expenses have been paid. Is there more things that could maybe make up profit (like appreciation, tax benefits, etc) – of course! But it doesn’t make “cash flow” any less “profit” does it?

      Finally, (this is referring to your argument later in this thread) when we talk about “Cash Flow” in an investment deal, we are INCLUDING things like roofs, parking lots, etc. It’s a term we call “Capital Expenditures” and it’s part of the operating expenses. So when we talk about Cash Flow – we are ACTUALLY talking about Cash Flow, not whatever you have chosen to define cash flow as.

      It seems to me you like to pick fights. I mean, I’m all for debates. But let’s keep things simple and not attack a person because you define words differently than others.

      • ALOHA BRANDON i’d love to discuss this in two separate forum threads, cf v profit and correct use of cap rates. Not trying to be argumentative but to give factual information based on my 40 year & $40, 000, 000, 000 experience. I’m sure your interest is for your membership to have the best information.

  2. Bob, once again you are confusing buying for cash flow with buying for appreciation. You buy with consideration for appreciation over immediate cash flow, which is fine, but that is a totally different animal when it comes to evaluating potential deals. All of my articles for the almost two years I’ve written for BP have always referred to buying for cash flow, not buying for appreciation (either strictly for appreciation or incorporating appreciation into my profit analyses), and I’m very open that I invest for cash flow, that is my niche, and therefore that’s what I write about. You’ve been very excited with several of my articles in the last few months to tell me how stupid I am and how I have no idea what I’m talking about and how I’m misleading for readers, but you and I don’t even invest using the same methods so of course my information will seem completely inaccurate to you. If you don’t like investing for immediate cash flow, that’s your preference and that’s totally fine. But other people do invest for immediate cash flow, as do I, and those are the people my articles are written for. If I was writing about investing for appreciation and you disagreed with what I wrote, then that would be one thing, but the information I provide is not relevant to your method or preference for investing.

    I even clarified in this one, in the last sentence of the article, saying this information doesn’t apply if you are buying for appreciation.

    I realize you think everyone should follow your method of investing, and maybe that has been a very successful method (as you quite openly suggest), but just not everyone wants to be in that same niche. There are several niches out there, none of them are ‘wrong’, and everyone will have their own preferences as to what method they choose.

    • Ali Boone, one again you are being evasive and not presenting the facts correctly.
      1. You article is about investing for profit NOT cash flow.
      2. You incorrectly confuse cash flow as profit. THAT IS A HUGE MISTAKE. (google it).
      3. You did not address how a 5% cap could make you PROFIT in a 1% cap market because you have no clue about cap rates other than the mathematical formula.
      4. The ONLY reason to talk about a cap rate on a SFR is to trick an investor into investing. You make money facilitating these don’t you? For shame. Do you need trickery?

      If you want to blog about cash flow fine but do not try to bamboozle people into thinking It is profit. Personaly I think you are caught up in a Ponzi scheme and your all cash investment is being dribbled back to you (you’ve only done this a year or two) and will eventually stop after you’ve been milked dry.

      • If there is nothing else in this world that I know, I do know that I’ve never invested in a Ponzi scheme. Given the definition of a Ponzi scheme, that would be impossible for what I’ve bought (in so many ways).

        Feel free to do a write-up in the forums or a blog or something explaining cash flow versus profit, Bob, and send me the link. I will certainly check it out.

  3. Ali Boone,
    Hello “Fly-Lady” (it’s a compliment. i admire fliers, i’m afraid of heights…)
    i don’t agree with some of your other posts, but this one I think you nailed it!

    i’m finding this one out with my first investment property. good purchase price in a “good” zone in a bad neighborhood, some initial repairs, some catch-up repairs, i’m settin money aside for deffered maintenance/eventual repairs…
    but i still think i got a good deal.

    • Sounds like you did Dumitru and you’re being smart keeping funds aside for it. What market is it in?

      And thanks! Glad you liked it. If you ever don’t agree with any of my posts, don’t hesitate to reach out either on the comments or message me and let me know. I’m always open to hear other perspectives (helps me learn too) and other experiences.

      • Dumitru Anton on

        Hi @Ali Boone.
        I’m a newbie, but I work in Chicago Southside and Chicago West suburbs. (only 2 properties right now…)
        still learning. getting money aside for when a third property may be on the radar…

  4. Marco Santarelli on

    “Profit” is an ambiguous term and very confusing to most real estate investors. What are you referring to (net cash-flow, equity, total ROI, etc)? One should always use the clearly defined terms that quantify the financial performance of any investment property.

    For example, this is what we show our investor clients:

    ** Net Operating Income (NOI) — the total income minus the total expenses of the property (not including any debt service, which is not an expense).

    ** Cap Rate — a reasonable way to compare different properties on an apple-to-apples basis, but not one of our favorite or preferred metrics with residential real estate. This is the NOI divided by your acquisition costs.

    ** Cash-on-Cash Return — this is a good way to measure your actual cash rate of return. We use this one often to measure the real world return on your investment. This is the annual net cash-flow generated by the property divided into your total cash outlays (initial investment, repairs & maintenance, etc).

    ** Rent-to-Value Ratio — this is the monthly rent divided into the purchase price/market value. This gives you a quick measure of the potential or expected cash-flow and cash-on-cash return the property will generate.

    ** Cash-Flow — last, but not least, is the actual NET cash-flow generated by the property. This is the bottom line spendable cash produced. Most, but not all, of our investors are focused on the net cash-flow but that is not necessarily the only reason to pick a specific property. This comes back to one’s investment goals and criteria.

    Technically, appreciation is NOT considered “profit” since it is nothing more than an unrealized gain that does not generate any income or rate of return until. There are more advanced strategies that we employ to generate income from the equity gains, but that is beyond the scope of this article.

    This is just a quick overview to help clarify the real-world definitions used with investment property. You may also consider reading my article *Calculating Return on Investment in Real Estate*:

    Continued success!!

    • Marco, NOI ONLY includes operating expenses. There are more expenses that a smart investor needs to account for to determine profit.

      Where do you get NOI from other SFR properties to make “apples to apples” comparisons? Totally useless in small residential.

      Rent to value ratio also is NOT a predictor of profit. Can be useful in determining cash flow very roughly.

      Net cash flow is NOT profit. It can be important if you NEED the cash flow to collect the profit.

      • Marco Santarelli on

        Hi Bob:

        1) I agree with you and that’s what I said above. NOI includes only (and all) operating expenses. Debt service is not one of them.

        2) I didn’t say NOI should be used to make a comparison. I said the cap rate can be used to make a quick and general comparison. No single metric should be used in isolation and it’s best to consider all the financial elements of a property.

        3). I never said the R/V ratio was a predictor of profit. It’s basically a quick litmus test or rule-of-thumb to get an ‘idea’ of its ability to cash flow. Nothing more.

        Continued success!

        • Thanks Marco,
          1. Again I just want to clarify that operating expenses do not include capital expenses so if you think you have $200 a month cash flow that if you need a new roof at $5,000 that will cost you over TWO years of “profit” as incorrectly defined by Ali Boone. So NO cash flow for two years where’s the profit in that? Ali Boone keeps declaring that cash flow is PROFIT!

          2. Marco said, ” I said the cap rate can be used to make a quick and general comparison.” HOW AND WHY? If you are taking a properties NOI against a possible sales price how do you make any comparison? Say you do this silly calculation on several properties. Say you get a 9% number and a 10% number. Then let’s say the market cap rate comps are all 14%! See how you wasted your time? Better to use the market caps against the properties you’re considering and come up with a market value. Then if the sellers don’t want to sell at market cap then they are NOT sellers in this market and you wasted effort “comparing” non market properties.

          3. Great, rent ratios are only an indication of CASH FLOW which is NOT profit so it should not be in Ali Boone’s blog about calculation profit. It is very misleading. On purpose?

        • Marco Santarelli on

          Hi Bob,

          I like using the bulleted list…

          1) That’s correct, investors need to differentiate between ‘capital expenses’ and ‘maintenance and repairs’. What I find is many investors budget for future repairs using an operating expense line item.

          2) What I was thinking regarding the cap rate as a comparison measure was a comparison between markets (because we sell turnkey properties in many U.S. markets). But again, I don’t particularly like using cap rates. For starters, it’s best suited for commercial properties — residential properties are not valued or appraised using cap rates.

          3) Again, I only use the R/V ratio as a high-level check on the property’s potential. It works quite well, but always requires further analysis.

          Continued success!

    • Good definitions Marco and all correct (although I would note that for the purposes of analyzing rental properties, “cash flow” and “net operating income” are typically the same). In terms of my article, you are correct in that I should have clarified my definition for “profit” to help readers. But really what I mean by profit doesn’t have to be that specific either. Profit is profit, just as it sounds- money in your pocket. It would help to clarify, possibly, in what form I am referring to money getting the into your pocket (equity, cash flow, etc.) but at the same time, all I care about as an investor is making money, no matter what form it comes in. A property is either going to put money in your pocket or take it out, and that is the concept I am hitting here. As long as a property puts money in my pocket, that is what I care about. And unless the properties I used as examples see some major appreciation at some point, they aren’t likely to put money in someone’s pocket.

      So yes, for more detailed analyses understanding all of the terms and the true sources of “profit” and such, yes I’d have to dig into more details. But for this article specifically, more of the point than showing how to profit is showing how some properties should be considered risks for profit.

      • Actually, “Cash Flow” and “Net Operating Income (NOI)” are NOT the same. In fact, they can be very different.

        The Net Operating Income (NOI) is the operating income minus the operating expenses. This is crucial to know — especially as it relates to commercial properties. This is the cash-flow of a free-and clear property.

        The Cash Flow can be ‘before tax’ or ‘after tax’. The before tax cash-flow is your NOI minus all debt service. If there is no debt service then it would be the same as your NOI. But if there is debt service (as often is the case), these numbers can be VERY different. And therefore very important to one’s analysis.

        • Oh, sorry Marco, I wasn’t thinking in this case of debt service as I was just thinking of raw numbers. If you are looking at that, then yes there is a difference. Sorry for the confusion.

          Although for cash flow, I’ve never heard of breaking cash flow down into ‘before tax’ and ‘after tax’ because if all is done correctly, rental property income typically becomes (essentially) tax-free because of the balancing of the write-offs, including depreciation, negating the amount that would normally be paid in taxes.

          If you break yours down into before- and after- tax, what do those analyses look like when you do them? How do you determine your after-tax cash flow versus before-tax?

        • Actually, every investment you can put your cash into has a “before” and “after” tax cash-flow. This is standard finance and accounting. The before tax cash-flow will be the same for everyone on an investment, however the after tax cash-flow will differ because everyone’s tax situation will be different. After tax cash-flow is simply what is left over from the investment (property) after you factor in your tax implications.

        • I know everything has a before- and after-tax Marco, but for the purposes of calculating cash flow how do you recommend investors consider the after-tax cash flow? Do you just mean use a standard ‘deduct 33% of the before-tax income’ type of theory?

          The reason I ask is because rental properties have so many tax benefits, how can someone know how to take those into account if you are suggesting they need to calculate after-tax cash flow?

          In my experience so far, I’ve yet to have owed anything to the IRS from my rental property income because all the write-offs balance it out, if not put extra money in my pocket. So there isn’t a different after-tax cash flow for me. As I would believe to be the case with most rental property owners (who have their taxes done correctly).

        • Once Cash Flow Before Taxes is determined, it’s a simple matter to subtract tax liability to determine Cash Flow After Taxes. It’s possible that, due to accrued losses deductible in later years, that this after tax cash flow could actually be a positive number and be higher than the cash flow before taxes:

          1. Determine the cash flow before taxes.

          2. Subtract the income tax liability, state and federal. The result is the Cash Flow After Taxes.

          3. Another method of calculating CFAT is: CFAT = Net Income + Depreciation + Amortization + Other Non-Cash Charges.

          They really aren’t that different, as you’re just adding back cash items that were subtracted for the Cash Flow Before Taxes calculation. In the CFBT calculation, debt service is subtracted from Net Income, as it’s a cash outflow. However, the depreciation and interest are both deductible for taxes, and thus are added back to get the CFAT.”

        • Right, so calculating CFAT is kind of pointless because at a minimum you will have depreciation added back on. Never mind all the other expenses added back on- repairs, taxes, fees, etc. So yes CFAT is a real thing in this case, but calculating it won’t serve much of a purpose unless you know those other variables. If you don’t, it won’t be accurate.

          The bigger point would be to take this back to the point of the article- which is buy properties that put money in your pocket. There’s no way to know down to the dime how much a property will ever put in your pocket, so the best you can do is be as educated as possible in how you run your numbers and even after that, there should be some buffer in case any unknowns pop up. But never once have I seen an attempt to calculate the exact cash flow after taxes, because there’s no realistic way to figure it out exactly, and rental property income should end up ballpark tax-free (essentially) because of depreciation and other items.

        • Ali — I understand the point of the article, but the ATCF is far from “pointless”, and any accountant, CPA, financial or tax planner would have serious issue with that statement. The fact is that everyone’s tax situation is different. You are illustrating an over-simplified example which does not apply to every investor because the tax implications do not end with the property, they end with the bottom line on the investor’s tax return…

          Cash flow after taxes (CFAT) is the money the investor can REALLY pocket once the federal and state taxes are satisfied. It is a more meaningful bottom-line.

          A savvy real estate investor will pay attention to, and know, their after-tax cash flow on their investments.

          Continued success!

        • Lol. I never meant pointless in general Marco, I’m saying for the purposes of calculating returns. Any investor is more than welcome to take out an estimated tax payment that will come from their rental income. It’s a great way to remain as conservative as possible. But anyone not receiving substantial tax benefits from a rental property is doing it wrong.

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