How to Calculate Rental Property Cash Flow

Cash flow is king in rental property investing. Not potential appreciation. Not tax benefits. Cash flow - the actual money left in your pocket each month after all expenses. This guide shows you how to calculate it accurately so you never buy a money pit disguised as an investment property.

What Is Cash Flow (Really)?

Cash flow is brutally simple: money in minus money out. But the devil is in the details of "money out." Most new investors dramatically underestimate expenses and end up with negative cash flow despite positive projections.

Positive cash flow means profit every month. Negative cash flow means you're bleeding money. Break-even means you're a property manager working for free.

The Complete Expense List (Don't Miss Anything)

Here's every expense category you need to include. Missing even one can turn a profitable property into a loser.

Fixed Expenses (Same Every Month)

1. Mortgage Payment (PITI)
Principal, Interest, Taxes, Insurance bundled into one payment. This is usually your largest expense. Don't forget: taxes and insurance typically increase 3-5% annually.

2. HOA Dues
Condos and some single-family homes have HOA fees. These can be $100-800+/month and often increase annually. Check HOA rules - some restrict rentals or require approval.

3. Landlord Insurance
Different from homeowner's insurance. Covers liability, property damage, loss of rent. Typically 25% more expensive than homeowner's insurance. Budget $800-2,000/year depending on property value and location.

Variable Expenses (Change Monthly/Annually)

4. Property Management
Professional management: 8-12% of monthly rent plus leasing fees (50-100% of one month's rent). Self-managing? Your time has value - budget at least 5% of rent for your labor.

5. Maintenance & Repairs
Budget 1% of property value annually minimum. Older properties need 1.5-2%. This covers: plumbing repairs, appliance fixes, painting, landscaping, pest control, emergency repairs. Example: $250,000 property = $2,500/year = $208/month.

6. Capital Expenditures (CapEx)
Big-ticket replacements: roof ($8,000-15,000, lasts 20-30 years), HVAC ($5,000-10,000, lasts 15-20 years), water heater ($800-1,500, lasts 10-15 years), appliances ($2,000-4,000, lasts 10-15 years), flooring/carpet ($3,000-8,000, lasts 5-10 years). Budget 8-12% of gross rent monthly for CapEx reserves. Yes, on top of maintenance.

7. Vacancy
No property stays 100% occupied. Between tenants, you lose rent during turnover, marketing, and repairs. Budget 5-8% of annual rent minimum. Higher in competitive markets or with shorter leases. Example: $2,000/month rent × 5% = $100/month vacancy allowance.

8. Utilities
If landlord-paid: water/sewer ($50-150/month), trash ($20-50/month), gas ($30-100/month in winter), electricity ($80-200/month), lawn care ($80-150/month). Make tenants pay utilities whenever possible.

9. Property Taxes
Usually included in mortgage (PITI) but may be separate. Taxes increase - budget 3-4% annual increases. Check if property is assessed at purchase price or old value. Buying a $300K property assessed at $200K? Expect a tax increase.

10. Accounting & Legal
CPA for tax prep: $300-800/year. Attorney for evictions or lease issues: $500-2,000 when needed. Budget $50-100/month.

Step-by-Step Cash Flow Calculation

Let's walk through a real example with actual numbers.

This property loses $451 every month. Over a year, you're writing checks for $5,412 out of pocket. Many investors would look at this property and think "my mortgage is only $1,566 and rent is $2,400 - I'll make $834/month!" They'd be wrong by $1,285/month because they forgot about the other expenses.

What's a Good Cash Flow Target?

Minimum targets vary by strategy:

• $200-300/month per unit: Minimum for cash flow investing
• $100-200/month per unit: Acceptable in appreciation markets
• $0-100/month per unit: Break-even to slight positive, banking on appreciation
• Negative cash flow: Only acceptable if appreciation is very strong and you have reserves to cover losses

Remember: these are monthly targets AFTER all expenses including maintenance, CapEx, and vacancy. Not just "rent minus mortgage."

How to Improve Cash Flow on a Property

If the numbers don't work, you have 5 levers to pull:

1. Lower Purchase Price

Negotiate harder. Offer based on cash flow requirements, not asking price. In our example above, what price makes the numbers work? If we need $200/month cash flow, work backwards: $2,400 rent - $200 desired cash flow = $2,200 max expenses. Reduce mortgage to $1,400 = need loan of ~$200K = purchase price of $250K with 20% down. Offer $250K or walk away.

2. Increase Rent

Can you get $2,600 instead of $2,400? Small rent increases have huge impact on cash flow. Extra $200/month rent = $2,400/year. But verify with comps - don't overestimate achievable rent.

3. Decrease Expenses

• Self-manage (save 8-10% of rent)
• Make tenants pay utilities
• Shop for better insurance rates
• Appeal property tax assessment
• DIY repairs when possible

4. Increase Down Payment

Putting 25% or 30% down reduces monthly mortgage significantly. Trade-off: ties up more capital, reduces leverage, lowers cash-on-cash return but improves cash flow.

5. Get Better Financing

Lower interest rate = lower mortgage = better cash flow. Even 0.5% rate difference matters. On $224K loan, 7.0% vs 7.5% saves $70/month ($840/year).

Monthly vs Annual Cash Flow

Always calculate both. Some expenses hit annually (insurance, taxes if not escrowed, repairs). Your monthly cash flow might look great until you get hit with $3,000 roof repair.

Smart approach: Track cash flow monthly but evaluate annually. Set aside monthly CapEx and maintenance reserves in a separate account so you're not caught off guard.

Mistakes That Kill Your Cash Flow Projections

Mistake 1: Using Optimistic Rent Estimates

Don't use Zillow's "Rent Zestimate" or asking rent prices. Use actual rents from recently rented properties (not listings). Better to be conservative and pleasantly surprised than aggressive and disappointed.

Mistake 2: Ignoring Vacancy

"But my property management company guarantees 95% occupancy!" Even if true, that's 5% vacancy = lost rent. Plus turnover costs (cleaning, repairs, marketing). Always budget vacancy.

Mistake 3: Underestimating Maintenance

New investors budget $500/year for maintenance. Experienced investors budget $2,500-3,500/year for a $250,000 property. Guess who runs out of money? One HVAC replacement wipes out three years of "savings."

Mistake 4: Forgetting CapEx

Maintenance is fixing broken things. CapEx is replacing old things. Both are necessary. Both are expensive. Budget for both separately.

Mistake 5: Not Accounting for Rent Growth

Flip side: expenses grow (3-4% annually) but so does rent (3-4% annually in stable markets, more in hot markets). Year 1 break-even property can become Year 5 profit machine as rents rise but mortgage stays flat.

Cash Flow vs Cash-on-Cash Return

Don't confuse these:

Cash Flow = Dollar amount left over each month
Example: $300/month = $3,600/year

Cash-on-Cash Return = Return percentage on invested capital
Example: $3,600 annual cash flow ÷ $60,000 invested = 6% CoC return

You can have great cash flow ($500/month) with poor CoC return (3%) if you invested a lot. Or poor cash flow ($100/month) with great CoC return (12%) if you invested very little.

The Bottom Line

Accurate cash flow calculation separates successful investors from those who lose money in real estate. It's not complicated - it just requires honesty about expenses and discipline to walk away from deals that don't work.

The best deals have strong cash flow from day one. They don't "become good deals" through appreciation or hoped-for rent increases. They work today, based on today's rents and today's expenses, with conservative assumptions.

Run the numbers. Include every expense. Be conservative. Pass on negative cash flow properties unless you have a very specific appreciation strategy and deep pockets to cover monthly losses. Your future self will thank you.