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Understanding Rental Property Cash Flow
Cash flow is the money left in your pocket each month after collecting rent and paying every expense tied to the property — mortgage, taxes, insurance, vacancy, and maintenance. It's the single most important number for a rental investment, because appreciation is a guess about the future, but cash flow is money you can actually spend today. A property can look great on paper and still bleed cash every month if the numbers aren't run correctly before you buy.
Most new landlords only budget for the mortgage payment, taxes, and insurance — then get blindsided by a vacant month, a broken water heater, or a new roof five years in. This calculator builds in standard reserves for vacancy and maintenance so your cash flow number reflects reality, not just a best-case month.
The Cash Flow Formula
Monthly cash flow is calculated by subtracting every expense from your rent income:
Cap Rate = (Annual Rent − Annual Operating Expenses, excluding mortgage) ÷ Purchase Price × 100
Cash-on-Cash Return = Annual Cash Flow ÷ Total Cash Invested × 100
Cap rate ignores financing entirely — it shows the return as if you'd paid all cash, which makes it useful for comparing properties on equal footing. Cash-on-cash return factors in your actual financing and shows the real return on the money you put down.
Worked Example
A $320,000 rental with 20% down ($64,000) at 6.9% over 30 years has a mortgage payment of about $1,683/month. Renting at $2,400/month, after subtracting property tax ($317), insurance ($117), an 8% vacancy reserve ($192), and an 8% maintenance reserve ($192), monthly cash flow comes out to roughly -$101 — slightly negative. This tells the investor that at this rent and price, the deal doesn't cash flow unless they negotiate a lower purchase price, increase rent, or put more down to reduce the mortgage payment.
What Counts as a Good Deal
- Positive cash flow after reserves — the property should cover itself, including vacancy and maintenance, not just the mortgage.
- Cap rate of 5-10% — varies heavily by market; higher-cost coastal markets often run 3-5%, while Midwest and Sun Belt markets often hit 7-10%.
- Cash-on-cash return above your alternative — compare it to what you'd earn investing that same down payment elsewhere, like index funds.
- The 1% rule as a quick filter — monthly rent at or above 1% of purchase price is a rough screening tool many investors use before running full numbers.