Why does the calculation for IRR use revenue, not profit?
The short answer is that you would want to use the net inflow or net outflow, aka profit or loss.   In my experience, you've got a couple different uses for IRR and that may be driving the confusion.  Pretty much the same formula, but just coming at it from different angles.   Thinking about a stock or mutual fund investment, you could project a scenario with an up-front investment (net outflow) in the first period and then positive returns (dividends, then final sale proceeds, each a net inflow) in subsequent periods.  This is a model that more closely follows some of the logic you laid out. Thinking about a business project or investment, you tend to see more complicated and less smooth cashflows.  For example, you may have a large up-front capital expenditure in the first period, then have net profit (revenue less ongoing maintenance expense), then another large capital outlay, and so on.   In both cases you would want to base your analysis on the net inflow or net outflow in each period.  It just depends on the complexity of the cashflows trend as to whether you see a straightforward example (initial payment, then ongoing net inflows), or a less straightforward example with both inflows and outflows.   One other thing to note - you would only want to include those costs that are applicable to the project.  So you would not want to include the cost of overhead that would exist even if you did not undertake the project.
If you are able to buy a 150K home for 50K now that would be a good deal!  However, you can't you have to borrow 100K in order to make this deal happen.  This dramatically increases the risk of any investment, and I would no longer classify it as passive income.   The mortgage on a 150K place would be about 710/month (30 year fixed).  Reasonably I would expect no more than 1200/month in rent, or 14,400.  A good rule of thumb is to assume that half of rental revenue can be counted as profit before debt service.  So in your case 7200, but you would have a mortgage payment of 473/month.  Leaving you a profit of 1524 after debt service.  This is suspiciously like 2K per year.  Things, in the financial world, tend to move toward an equilibrium. The benefit of rental property you can make a lot more than the numbers suggest.  For example the home could increase in value, and you can have fewer than expected repairs.  So you have two ways to profit:  rental revenue and asset appreciation. However, you said that you needed passive income.  What happens if you have a vacancy or the tenant does not pay?  What happens if you have greater than expected repairs?  What happens if you get a fine from the HOA or a special assessment?  Not only will you have dip into your pocket to cover the payment, you might also have to dip into your pocket to cover the actual event! In a way this would be no different than if you borrowed 100K to buy dividend paying stocks.  If the fund/company does not pay out that month you would still have to make the loan payment.  Where does the money come from?  Your pocket.  At least dividend paying companies don't collect money from their shareholders. Yes you can make more money, but you can also lose more.  Leverage is a two edged sword and rental properties can be great if you are financial able to absorb the shocks that are normal with ownership. California is very aggressive about enforcing LLC franchise taxes.  The only correction I'd make to Kekito's answer is that the fee is $800 minimum or some percentage of the LLC's total business volume in the state.  What's killer about it is that the tax is dependent not on what your LLC's profit is, but what its revenues are!  Here's a good link explaining how the tax is calculated: California LLC Franchise Tax Rates Be very careful about making sure you comply with every dot in the California codes or else you really won't like what happens.  It's one of the reasons so many companies avoid locating operations in California if at all possible. I hope this helps. Good luck! "Can you elaborate? What other countries are you talking about?   It's definitely not uncommon for publicly funded ""healthcare"" (unsure why you put this in quotations) to go to corporate revenues / profits. Canada and Switzerland are two examples off the top of my head who use similar systems. Many other countries use a private sector component.   ""The margins are huge"" largely because of government involvement. The bloated Resource-Based Relative Value Scale (RBRVS) standardized payment scheme determines payments for services based on the resource costs estimated by a committee that meets in private (the Relative Value Update Committee).   This impractical archaic value system has been adopted by 80% of private insurers, impairing their ability to drive down and offer more competitive prices." "For practical purposes, I would strongly suggest that you do create a separate account for each business you may have that is used only for business purposes, and use it for all of your business income and expenses. This will allow you to get an accurate picture of whether you are making money or not, what your full expenses really are, how much of your personal money you have put into the business, and is an easy way to keep business taxes separate. You will also be able to get a fairly quick read on what your profits are without doing much accounting by looking at the account balance less future taxes and expenses, and less any personal money you've put into the account. Check out this thread from Paypal about setting up a ""child"" account that is linked to your personal account and can be set up to autosweep payments into your main account, should you like. You will still be able to see transactions for each child account. NOTE: Do be careful to make sure you are reserving the proper amount out of any profits your startup may have for taxes - you don't want to mix this with personal money and then later find out that you owe taxes and have to scramble to come up with the money if you have already spent it This is one of the main reasons to segregate your startup's revenues and profits in the business account. For those using ""brick and mortar"" banking services rather than a service like Paypal: You likely do not need a business checking account if you are a startup. Most likely, you can simply open a second personal account with your bank in your name, and name it ""John Doe DBA Company Name"" (DBA = Doing Business As). This way, you can pay expenses and accept payments in the name of your startup. Check with your banker for additional details (localized information)." It's one of those things where it was meant, economically, for the first purpose (opportunity cost) but has been used by big corporations for the later since you have to have international divisions to really even make it work (to some degree it does on the state level; however, the tax breaks aren't really big enough for it to make sense since the Federal is the big one).   It's also a huge reason why big corps have such low effective domestic tax rates on big profits and why the government is debating about restructuring tax law to prevent most forms of FTP'ing (you'd pay taxes on Gross Income essentially. It gets MUCH more complicated than that but France effectively does this now).  Also, it's very much an accounting thing, and accountants tend not to have a big seat at the table. Hence, the reasoning behind stuff often get lost on upper mgmt (or they fire the accountant, etc.). That's a BIG part of why it often makes things worse even when when the principal makes sense economically... "A lot of financial software will calculate the value of operating leasess for you (bullet 2). E.g. Capital IQ, BB.   What a lot of professionals do is ""reverse"" out EBITDA/EBIT etc. for:  - non-recurring expenses (think big accounting changes, some impairments) - change operating expenses into capital leases to adjust the capital structure - occasionally change some operating expenses (e.g. options) because you are under the assumption if you take a company private that those expenses will not be relevant  The whole point is simply to see the operating revenues/expenses of the firm" "Your corporation would file a corporate income tax return on an annual basis. One single month of no revenue doesn't mean much in that annual scheme of things. Total annual revenue and total annual expenses are what impact the results. In other words, yes, your corporation can book revenues in (say) 11 of 12 months of the year but still incur expenses in all months. Many seasonal businesses operate this way and it is perfectly normal. You could even just have, say, one super-awesome month and spend money the rest of the year. Heck, you could even have zero revenue but still incur expenses—startups often work like that at first. (You'd need investment funding, personal credit, a loan, or retained earnings from earlier profitable periods to do that, of course.) As long as your corporation has a reasonable expectation of a profit and the expenses your corporation incurs are valid business expenses, then yes, you ought to be able to deduct those expenses from your revenue when figuring taxes owed, regardless of whether the expenses were incurred at the same approximate time as revenue was booked—as long as the expense wasn't the acquisition of a depreciable asset. Some things your company would buy—such as the computer in your example—would not be fully deductible in the year the expense is incurred. Depreciable property expenses are deducted over time according to a schedule for the kind of property. The amount of depreciation expense you can claim for such property each year is known as Capital Cost Allowance. A qualified professional accountant can help you understand this. One last thing: You wrote ""write off"". That is not the same as ""deduct"". However, you are forgiven, because many people say ""write off"" when they actually mean ""deduct"" (for tax purposes). ""Write off"", rather, is a different accounting term, meaning where you mark down the value of an asset (e.g. a bad loan that will never be repaid) to zero; in effect, you are recognizing it is now a worthless asset. There can be a tax benefit to a write-off, but what you are asking about are clearly expense deductions and not write-offs. They are not the same thing, and the next time you hear somebody using ""write off"" when they mean ""deduction"", please correct them." Another way to look at this is if we separate the owner's account from the business's account.  At the start of the year, the owner puts $9 into the business account to get the business started. At the end of the first day, the business account has $10, and at the end of the second day, the business account has $11.  The owner doesn't need to add any more of his own money into the business account. At the end of the 365th day, the business will have $374, which is $365 profit + $9 investment.  Assuming the business has no other expenses, the business will calculate profit for the year like this: The author is making a strange point. The two numbers he is talking about are two different quantities. The business owner's return on investment is $365 / $9 = 4056%.  But the business's profit margin is $365 / $3650 = 10%.  Both are useful numbers when running the business. I disagree with the author's insinuation that a business is doing something tricky when calculating profit margin. Remember that, in addition to the business owner's monetary investment, he worked every day for a year to earn that $365.