How to read a cash flow statement for a rental property
A cash flow statement explains why your bank balance changed during a period. It starts from net income and adjusts for things that move cash without touching profit: depreciation (profit is lower, cash is not), loan principal (cash leaves, profit is untouched), and money put in or taken out by the owner. That is why a rental can show a profit and still lose cash.
Profit and cash are different numbers
The profit and loss statement counts depreciation as an expense, because the building loses value over time for tax and accounting purposes. IRS Publication 527 explains depreciation as a deduction that recovers the cost of the property over years. No cash leaves your bank when you take it. The mortgage principal works the other way: it is real cash out, but it is not an expense, so it never reaches the profit and loss.
The cash flow statement puts the two back together. It answers a simple question: of the money that came in, how much is still in the bank, and where did the rest go?
Three sections
- Operating: net income, plus depreciation, plus or minus changes in tenant balances, bills owed and deposits held. This is the cash the property itself produced.
- Investing: buying or improving the building, or selling it. Capital improvements go here, not in operating.
- Financing: loan principal repaid, new loans, owner contributions and owner distributions.
The three added together equal the change in the bank balance. If they do not, something is booked wrong, and the statement is a check on the books.
A worked year
Example a made-up rental has net income of $9,000 for the year after $11,500 of depreciation. It paid $8,200 of loan principal, spent $4,000 on a new water heater, and the owner took $3,000 in distributions. Security deposits held went up by $1,500 and tenants owed $500 more than last year.
| Line | Amount |
|---|---|
| Net income | $9,000 |
| Add back depreciation | $11,500 |
| Deposits held, up | $1,500 |
| Tenants owe more (rent not yet received) | -$500 |
| Cash from operating | $21,500 |
| Water heater (investing) | -$4,000 |
| Loan principal repaid | -$8,200 |
| Owner distributions | -$3,000 |
| Change in cash | $6,300 |
Check: $9,000 plus $11,500 plus $1,500 less $500 is $21,500. Then $21,500 less $4,000, $8,200 and $3,000 is $6,300. The bank balance went up $6,300 even though profit was $9,000. Under the cash method, tenant balances would not appear at all, because unpaid rent is not booked.
The deposits line needs a note: security deposits held are tenants' money, not yours. Keep them in their own account (see security deposit accounting). Treat a higher deposit balance as cash you hold, not cash you can spend.
What to do with the statement
- Compare the ending cash to the bank balance and to the reconciled bank statement. They must agree.
- Look at operating cash alone. If it is negative, the property cannot pay its own bills.
- Look at financing. If distributions are bigger than operating cash less principal, you are paying yourself from reserves or from loans.
- Check how much is left for the operating reserve.
How it differs from NOI
Net operating income leaves out debt service, depreciation and capital spending, so it describes the building rather than your cash. The cash flow statement includes all three. Lenders and buyers want NOI, and your own bank account follows the cash flow. The way NOI is built is in how to calculate NOI.
How DoorKeeping handles it
DoorKeeping builds the cash flow statement, the profit and loss, the balance sheet and the general ledger for each property from the same ledger, so the numbers agree. You can open them on screen, download them as a spreadsheet or PDF, or ask Claude or ChatGPT for the cash flow of one property or the whole portfolio. Your preparer decides how items are treated on your return.
Sources
- IRS, Publication 527, Residential Rental Property (2025), read Oct 30, 2026
- IRS, Recordkeeping, read Oct 30, 2026
Questions
- Why is my rental profitable but my bank balance fell?
- Loan principal, capital improvements and owner distributions use cash without reducing profit. Depreciation reduces profit without using cash. The cash flow statement lists each one.
- Is depreciation added back on a cash flow statement?
- Yes. It lowered net income but did not use cash, so it is added back in the operating section.
- Where do capital improvements appear?
- In the investing section as cash out. They are not an expense on the profit and loss unless they are repairs.