FFO: What It Is, Why It Matters for Real Estate Investors

When you’re looking at a real estate investment trust, or FFO, Funds From Operations, a standardized metric that measures the cash flow generated by a REIT’s core property operations. Also known as Funds From Operations, it strips out accounting noise like depreciation to show what money the property is actually making. Most people look at earnings per share, but that number can be misleading for real estate companies because of how depreciation is counted. FFO fixes that.

Real estate doesn’t wear out the same way a factory machine does. Buildings last decades, and their value often goes up over time. But under regular accounting rules, you’re forced to pretend they’re losing value every year—even when they’re not. That makes net income look lower than it should be. FFO adds depreciation back in, plus excludes one-time gains or losses from selling properties. The result? A clearer picture of the cash coming in from rent, minus operating costs like maintenance, taxes, and management fees. That’s what you care about: not paper losses, but actual money flowing from tenants to your pocket.

FFO is what professional investors use to compare REITs. If two companies both say they made $100 million in net income, but one has $120 million in FFO and the other only $85 million, the first one is generating more real cash from its buildings. You’ll see FFO in every REIT’s quarterly report, and it’s used to calculate payout ratios—how much of that cash is being paid out as dividends. A high dividend might look great, but if FFO can’t support it, the payout could get cut. That’s how people lose money chasing yield without checking the underlying cash flow.

Related concepts like REITs, Real Estate Investment Trusts, companies that own and operate income-producing real estate and are required to distribute at least 90% of taxable income to shareholders. Also known as Real Estate Investment Trusts, they are the main users of FFO, but it’s also tied to cash flow metrics, measures like EBITDA or operating cash flow that show how much money a business generates from its core operations. Also known as operating cash flow, they in other industries. FFO is just the real estate version—tailored to the unique way property values and expenses are tracked.

You’ll find posts here that dig into how FFO affects dividend safety, how to spot REITs with strong FFO growth, and why some companies manipulate earnings but can’t fake FFO. There’s also breakdowns of how FFO compares to NOI and AFFO—two other metrics you’ll see in REIT reports. None of them are perfect, but FFO is the baseline everyone uses. If you’re investing in real estate through stocks, not physical property, FFO is your starting point. Skip it, and you’re guessing. Use it, and you’re investing with your eyes open.