How to calculate cash flow on a rental property (honestly)

Ask a landlord what a unit cash-flows and you will usually get rent minus the mortgage payment. That number is wrong in a predictable direction — it is always too high, and it is why so many properties that "made $400 a month" somehow never accumulated any money.

The actual formula

Cash flow is gross rent, minus vacancy, minus operating expenses, minus debt service. Operating expenses means everything that is not the loan: taxes, insurance, maintenance, capital reserves, management, utilities you pay, HOA dues, and the small recurring stuff like pest control and lawn care.

The four costs people leave out

Vacancy. No unit is rented 100% of the time forever. Budget 5–8% of gross rent depending on your market. On $1,800 rent that is roughly $110 a month you should never have counted.

Maintenance. Plan on 1% of property value a year, or about 5–10% of rent. It will be zero for eight months and then $2,400 in one afternoon.

Capital reserves. Separate from maintenance. Roofs, furnaces, water heaters and appliances fail on a schedule you can forecast. Another 5% of rent set aside keeps a $9,000 roof from being a crisis.

Your time, or a manager's fee. If you self-manage, you are earning the 8–10% a manager would charge. Fine — but if you never price it in, you cannot tell whether the property works when you eventually hand it off.

A worked example

Rent $1,800. Vacancy at 6% is $108. Taxes $250, insurance $95, maintenance $120, capital reserves $90, management at 8% is $144. Operating costs total $807, so net operating income is $993. A mortgage payment of $850 leaves $143 a month in real cash flow — not the $950 the back-of-the-envelope version suggested. Run your own numbers through the rental cash flow calculator to see the same breakdown for a deal you're considering.

That is not a bad property. It is a property whose returns come mostly from principal paydown and appreciation, which is a completely different risk profile than one living off monthly income — and worth knowing before you buy another.

Cash flow is not the only return

A rental pays you four ways: cash flow, loan paydown, appreciation and tax treatment. Cash-on-cash return — annual cash flow divided by the cash you actually put in — is the honest comparison against other investments. The free cash-on-cash return calculator runs it in a minute, and the cap rate calculator shows the unlevered yield for comparison.

Then check it against reality

The projection is a guess until you track what actually happened. Run twelve months of real income and expenses through the free rental property spreadsheet and compare. Most landlords discover their maintenance estimate was low and their vacancy estimate was optimistic — better to learn that from your own numbers than from a surprise.