How to Calculate Cash Flow on a Rental Property

Cash flow is just money in minus money out

Monthly cash flow is the rent you collect minus every cost of owning the property: the mortgage payment, property taxes, insurance, maintenance, management, and an honest allowance for vacancy. If the number is positive, the property pays you each month; if it's negative, you're feeding it.

The mistake new investors make is counting only the mortgage. Budget 5–10% of rent for vacancy and another 5–10% for repairs and capital expenses (roofs and water heaters don't last forever). A property that looks profitable on paper often isn't once those reserves are included.

Cap rate vs. cash-on-cash return

Cap rate is net operating income (rent minus operating expenses, before the mortgage) divided by the purchase price. It lets you compare properties independent of how they're financed.

Cash-on-cash return divides your annual pre-tax cash flow by the actual cash you put in (down payment, closing costs, and rehab). It answers the question that matters most to a small landlord: what return am I earning on the money I actually invested? Many investors look for cash-on-cash in the 7–12% range.

Run your numbers before you offer

Plug a realistic rent and your true expenses into the cash flow calculator before you make an offer. If the deal only works with rosy assumptions, it doesn't work. Re-run it at a higher interest rate and a higher vacancy to see how much cushion you have.