Cash Flow on a Rental Property: How to Calculate It

Cash flow is the money left in your pocket each month after you have paid every operating expense and the mortgage. Positive cash flow means the property pays you. Negative means you top it up out of your own income every month.

The formula

Monthly cash flow = Monthly rent - operating expenses - mortgage payment

An example

A US$150,000 house rents for US$1,450 a month, bought with 20% down on a 30-year loan at 7%.

• Rent: US$1,450
• Mortgage (principal and interest): −US$798
• Property tax: −US$138
• Insurance: −US$92
• Management at 8%: −US$116
• Maintenance at 5%: −US$73
• CapEx reserve at 5%: −US$73
• Vacancy at 5%: −US$73

Cash flow is about US$87 a month, or roughly US$1,050 a year.

That is a thin but real margin, and it is a much more honest figure than the US$514 you would get by subtracting only the mortgage from the rent.

Why a positive number can still mislead

The single most common mistake first-time investors make is counting only the mortgage, tax and insurance. Leave out management, maintenance, CapEx and vacancy and the same deal appears to make US$400 a month. The costs you skipped do not disappear; they arrive all at once, in year three, as a US$9,000 furnace and a two-month void.

Treat anything under about US$100 a month as break-even in practice. One bad month erases a year of it.

Ways to raise it

• A larger down payment (though this lowers cash-on-cash return)
• A lower rate, or a longer loan term
• Self-managing, which saves the management fee but costs your time
• Buying in a market where rent is a higher share of price. See rent-to-price ratio

Related reading

Run a specific house through the calculator to see all of these at once, or compare whole markets in the market picker.