What is Cash Flow?
Cash flow is the money that remains after you collect rent and pay all operating expenses and mortgage payments. It's the actual profit you put in your pocket each month from your rental property investment.
Why Cash Flow Matters
Positive cash flow means your property generates more income than expenses—you're making money each month. Negative cash flow means you're losing money and must cover the difference from other sources.
Most successful rental property investors prioritize positive cash flow over appreciation.
Cash Flow Calculation
Breaking it down further:
Step-by-Step Calculation:
Step 1: Calculate Gross Rental Income
Start with your monthly rental income from the property:
Monthly Rent: $2,500
+ Other Income (laundry, parking): $100
= Gross Monthly Income: $2,600
Step 2: Subtract Vacancy Allowance
Account for expected vacancy (typically 5-10% of rent):
Gross Monthly Income: $2,600
− Vacancy (5%): −$130
= Effective Gross Income: $2,470
Step 3: Subtract Operating Expenses
Deduct all monthly operating expenses:
Property Taxes: $300
Insurance: $150
Repairs/Maintenance: $200
Property Management (10%): $250
HOA Fees: $0
CapEx Reserve: $100
Total Operating Expenses: $1,000
Step 4: Calculate NOI
Net Operating Income (before mortgage):
Effective Gross Income: $2,470
− Operating Expenses: −$1,000
= Net Operating Income (NOI): $1,470
Step 5: Subtract Mortgage Payment
Finally, deduct your monthly mortgage payment:
Net Operating Income: $1,470
− Mortgage Payment: −$1,200
= Monthly Cash Flow: $270
= Annual Cash Flow: $3,240
Understanding Operating Expenses
Operating expenses are the costs of running and maintaining your rental property. These are recurring expenses you'll pay regardless of whether you have a mortgage.
Include in Operating Expenses
- • Property taxes
- • Insurance (landlord policy)
- • Property management fees
- • Repairs and maintenance
- • HOA/condo fees
- • Utilities (if landlord pays)
- • Landscaping/snow removal
- • Capital expenditure reserves
- • Advertising/vacancy costs
Do NOT Include
- • Mortgage payments (principal & interest)
- • Income taxes
- • Depreciation
- • Capital improvements
- • Down payment/purchase costs
Note: Mortgage payments come after NOI calculation to determine cash flow.
Positive vs Negative Cash Flow
Positive Cash Flow
Income exceeds all expenses—you profit each month.
Income: $2,500
Expenses: $2,200
Cash Flow: +$300/month
- Sustainable investment
- Builds equity while profiting
- Buffer for unexpected costs
Negative Cash Flow
Expenses exceed income—you pay the difference out of pocket.
Income: $2,000
Expenses: $2,400
Cash Flow: -$400/month
- Requires monthly subsidy
- Risky if income drops
- Only works if appreciation expected
When Negative Cash Flow Might Be Acceptable:
Some investors accept temporary negative cash flow if they expect significant appreciation, tax benefits, or plan to increase rents soon. However, this is riskier and requires adequate reserves to cover monthly shortfalls.
Cash-on-Cash Return
Cash-on-cash return measures your actual return on the cash you invested, including down payment, closing costs, and any rehab expenses.
Example:
Annual Cash Flow: $3,240
Down Payment: $80,000
Closing Costs: $8,000
Total Cash Invested: $88,000
Cash-on-Cash Return: 3.68%
Tips for Maximizing Cash Flow
Increase Income
- • Screen tenants carefully to reduce turnover
- • Increase rents to market rate
- • Add income streams (laundry, parking, storage)
- • Consider short-term rentals if allowed
Reduce Expenses
- • Shop insurance annually for better rates
- • Appeal property tax assessments
- • Improve energy efficiency
- • Build handyman skills for minor repairs
- • Refinance to lower interest rates
Calculate Cash Flow for Your Property
Use our free calculator to instantly analyze cash flow, NOI, and other essential metrics for your rental property investment.
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