How do I calculate cash flow on a rental property?

Cash flow is the money left over each month after a rental property pays all of its bills, including the mortgage. It is the first number to check on any deal, because a property that loses money every month has to earn it back through appreciation, and appreciation is a hope, not a line item.

The cash flow formula

Cash flow equals gross rental income, minus vacancy loss, minus operating expenses, minus debt service.

Gross rental income is total rent at full occupancy. Vacancy loss accounts for the weeks between tenants. Operating expenses cover property management, maintenance, capital expenditure reserves, property taxes, insurance, and any landlord-paid utilities or HOA fees. Debt service is your full mortgage payment, principal and interest. What remains is pre-tax cash flow.

A worked example

Take a single-family rental purchased for $175,000 with 20 percent down, leaving a $140,000 loan at 7 percent over 30 years. Market rent is $2,000 per month, or $24,000 per year.

Deduct 8 percent vacancy ($1,920), 9 percent property management ($2,160), 8 percent maintenance ($1,920), 8 percent CapEx reserves ($1,920), $2,600 in property taxes, and $1,400 in insurance. Net operating income: $12,080. Annual debt service on the loan is about $11,180. Cash flow: roughly $900 per year, or $75 per month.

That is positive, but barely. One extra month of vacancy or one $1,500 repair wipes out the year. This is exactly the kind of deal where running the numbers honestly, instead of skipping vacancy and CapEx, changes the decision.

What counts as an expense, and what people skip

The two most commonly skipped expenses are the ones that make marginal deals look good: CapEx reserves and property management. Roofs, HVAC systems, and water heaters wear out on every property, so reserve for them even in years when nothing breaks. And budget management even if you self-manage: your time has a cost, and the deal should survive the day you stop wanting the 2 a.m. phone calls.

Principal paydown builds your equity, but it is still cash out the door every month. Cash flow uses the full mortgage payment because it measures what hits your bank account, not your net worth.

What is good cash flow?

Many buy-and-hold investors use $100 to $300 per month per unit as a working target, with the low end tolerated in appreciating markets and the high end expected in pure cash flow markets. More important than any single target is margin of safety: a deal projected at $75 per month has no room for error, while one projected at $300 can absorb a surprise and stay positive.

Cash flow also feeds the other core metrics. Divide annual cash flow by cash invested and you get cash-on-cash return. Divide NOI by debt service and you get DSCR, the ratio lenders check first. And the rent level where cash flow hits exactly zero is your break-even rent, the floor worth knowing before you buy.

Running the numbers

You can build this once in a spreadsheet and reuse it, or use Realastat's free rental property calculator to run income, expenses, and financing with no signup. However you run it, use conservative inputs: market rent you can prove, real tax figures, and vacancy and CapEx included every time. The formula is simple; the discipline is what makes it useful.