Real estate has six basic components that impact your pre-tax cash flow:


  • Revenue
  • Expenses
  • Capital Costs
  • Purchase
  • Sale
  • Debt


Let us dive deeper and explore each element. Better understanding means you can better analyze and manage your real estate and ultimately make the best investment decisions.


Revenue is simply any operating item that generates a cash inflow.  Commonly, this is rent, although not exclusively.  Additional revenue items include parking income, vending and laundry services, additional value add services (e.g., spa, daycare, etc).  Also, depending upon the lease structure, you will see reimbursed expenses (expense items paid by the owner that are later reimbursed by the tenant) included as revenue.


Expenses are operating items that reduce cash flow to the investor. Keep in mind that we are looking at this from the equity investor’s perspective. Our concerns are expenses borne by them. Expenses directly paid by tenants do not impact the owner’s cash flow and are omitted.  Common owner expenses vary by property type, but you may likely expect property management fees, administrative costs, owner-paid utilities, property taxes, insurance, and repairs/maintenance to be seen under the Expense section.

Capital Costs

This is a practical guide, so we are not going to discuss formal definitions of capital expenditures “increasing the cost-basis of the investment”. For our working definition capital costs are large, non-recurring costs for the property.  These would be large improvements or repair projects – think a new roof, or exterior paint, or subdividing a space, or HVAC updates or tenant fit-outs.


This is also the place to enter any reserve or placeholder for unknown capital projects.  For example, $0.30 / sf / yr for capital reserve.  This would be prudent modeling until you have a better idea of what is actually required. You may not know the exact work required to upgrade the lobby…but you know it will need to be done sometime.

Purchase & Sale

We can combine these two items as they are practically identical – two sides of the same coin. All items that are included in the purchase and sale of the investment are inputted here. This often includes a “gross” amount for the contract price and the associated closing costs, bringing you to a net amount (or “all-in” amount).


All items related to debt in a real estate cash flow are separated out and listed together in their own section. This will allow you to easily assess performance before- and after-debt, which is common practice.


Note that this differs from typical income statement and balance sheet treatments where the interest portion of a debt payment impacts net income on the income statement and principal paydown is a reduction of a balance sheet liability.  For a real estate cash flow…we can keep things simple.  All debt items go here, together.


You will often see debt referred to as “Leverage”. The terms are synonymous. No debt = “Unlevered”. Debt = “Levered”

Real Estate Cash Flow Formula

Revenue – Expenses = NOI – Capital Costs – (Purchase – Sale) = Unlevered Cash Flow – Debt = Levered Cash Flow

Concluding Thoughts

You now know the basic components of every (even the most complicated) real estate cash flow. A brief caveat: real estate cash flows are not constructed in accordance with specific accounting rules, and often do not need to be. As such, you may see some discrepancies and subjective interpretations – where is the “cutoff” for calling something R&M (repairs & maintenance) in the Expenses category as opposed to a Capital Cost? What about capital improvements associated with purchase and sale? As always, look to clarify any ambiguous line items and treatments.  The smartest people in a room usually ask the most basic questions that others are afraid too!

For more information on real estate cashflows, check out this article.

Now that you better understand the components in a Real Estate Cash Flow, sign up for a free 7 day trial with Money Weighted software to start building your own real estate models.