What rental cash flow really is
Cash flow is rent minus everything. The reason so many first rentals disappoint is that "everything" is longer than most spreadsheets admit: rent collected is not rent scheduled, the mortgage is not the only monthly cost, and the roof you have not replaced yet is a cost you are already incurring whether or not you have written it down.
This calculator enforces the order professionals use. Income first, reduced by vacancy and credit loss and increased by ancillary income, giving effective gross income. Then every operating cost, including a management fee and a reserve, giving net operating income. Only then the mortgage, giving cash flow. Keeping NOI as a distinct step matters because NOI is the figure that determines value and loan size, while cash flow is the figure that determines whether you sleep.
The two most commonly omitted lines are the ones that hurt most. A management fee is a real cost even if you do the work — it is what you are choosing to earn by doing it, and it is what the next buyer will pay. A capital reserve is a real cost even in a year when nothing breaks, because water heaters have finite lives and the average annual cost of owning one is its price divided by that life.
Each line, and which base it is calculated on
Two of the expense lines are percentages, and they use different denominators on purpose.
The management fee is a percentage of effective gross income, because managers are paid on what they collect. Charging it on gross scheduled rent overstates it by exactly the vacancy rate.
The maintenance and CapEx reserve is a percentage of gross scheduled rent, because the physical property wears at a rate that has nothing to do with whether it is occupied. A vacant unit still ages. Using scheduled rent as the base keeps the reserve stable across the vacancy assumption, which is what you want from a set-aside intended to smooth lumpy costs.
The debt service line comes from the standard amortised loan formula. Note that it is principal and interest only — taxes and insurance are already in the operating expenses above, so subtracting a full escrowed payment here would double-count them. If your servicer collects escrow, split the payment and use only the P&I portion.
The last line worth explaining is the coverage ratio. NOI divided by annual debt service is what a commercial or DSCR lender uses to size a loan, and it is computed from NOI, not cash flow — the reserve you deduct is a matter of your own prudence and the lender may or may not underwrite one. Size a loan from that ratio with the debt service coverage ratio calculator.
Worked example: a $2,400 rental with a $180,000 loan
A single-family rental leases for $2,400 a month with $50 of pet rent. You assume 5% vacancy, taxes of $4,200, insurance of $1,600, and $900 of owner-paid water, HOA and landscaping. Management is 8% of collections, and you set aside 10% of gross rent for maintenance and capital items. The loan is $180,000 at 6.5% over 30 years.
- Gross scheduled rent. 2,400 × 12 = $28,800.
- Vacancy and credit loss. 28,800 × 0.05 = $1,440.
- Effective gross income. 28,800 − 1,440 + (50 × 12) = $27,960.
- Management fee. 27,960 × 0.08 = $2,236.80.
- Reserve. 28,800 × 0.10 = $2,880.
- Operating expenses. 4,200 + 1,600 + 900 + 2,236.80 + 2,880 = $11,816.80.
- Net operating income. 27,960 − 11,816.80 = $16,143.20.
- Monthly principal and interest. With r = 0.065 ÷ 12 = 0.00541667 and n = 360, M = 180,000 × 0.00541667 ÷ (1 − 1.00541667−360) = 975 ÷ 0.856975 = $1,137.72, so annual debt service is $13,652.66.
- Annual cash flow. 16,143.20 − 13,652.66 = $2,490.54, or $207.55 a month.
- Coverage ratio. 16,143.20 ÷ 13,652.66 = 1.182.
Two hundred dollars a month on a $2,400 rent is an 8.6% cash-flow margin on gross rent (2,490.54 ÷ 28,800) — thin, and entirely dependent on the reserve actually staying unspent. Notice how much of the money the reserve and the management fee absorb: $5,116.80 between them, more than twice the cash flow. Remove both and the property appears to make $7,607 a year, which is the number that gets quoted at meetups and the reason people are surprised in year three.
How to judge the result
Read three things together: the dollar amount, the coverage ratio, and how far the vacancy assumption has to move before the number goes negative.
The dollars. Cash flow per unit per month is the traditional yardstick because it is comparable across price points. What counts as adequate depends on how many units you own — a $200 monthly surplus on your only rental is one broken furnace away from a bad year, while the same figure across twenty units is a real business, because the pool absorbs individual shocks.
The coverage ratio. Commercial and DSCR lenders generally require 1.20 or better; below 1.00 the property does not cover its own mortgage from operations. Conventional residential lending underwrites your personal debt-to-income instead, so a low ratio may not stop you borrowing — it just tells you the truth about the property.
The break-even vacancy. The chart above sweeps the vacancy assumption. If cash flow crosses zero within a couple of points of your assumption, the deal is not a cash-flow deal, whatever the headline figure says. That is not automatically disqualifying, but it should be a deliberate choice rather than a discovery.
Cash flow is also only one of four returns a rental produces. Principal paydown, appreciation and depreciation-driven tax savings all sit outside this calculation. A property at break-even cash flow can still be a good investment, and the rental property ROI calculator is where the other three get counted. To see the return on the cash you invested rather than the dollars per month, use the cash-on-cash return calculator.
Where the rent goes: the worked example as percentages
| Line | Annual | Monthly | % of gross rent |
|---|---|---|---|
| Gross scheduled rent | $28,800 | $2,400.00 | 100.0% |
| Vacancy and credit loss | −$1,440 | −$120.00 | −5.0% |
| Other income | $600 | $50.00 | +2.1% |
| Property taxes | −$4,200 | −$350.00 | −14.6% |
| Insurance | −$1,600 | −$133.33 | −5.6% |
| Utilities, HOA and other | −$900 | −$75.00 | −3.1% |
| Management at 8% of EGI | −$2,236.80 | −$186.40 | −7.8% |
| Maintenance and CapEx reserve | −$2,880 | −$240.00 | −10.0% |
| Net operating income | $16,143.20 | $1,345.27 | 56.1% |
| Debt service | −$13,652.66 | −$1,137.72 | −47.4% |
| Cash flow | $2,490.54 | $207.55 | 8.6% |
Every percentage is the annual figure divided by $28,800. Change the loan and only the last two rows move; change the rent and every row moves.
The lines people leave out
- Capital reserve. Roofs, HVAC, water heaters, flooring and appliances all have finite lives. A reserve converts those lumps into an annual cost. Skipping it does not make the cost disappear; it moves it to a year you did not plan for.
- Management. Even self-managing owners should price it, because the property's value to a buyer assumes a market fee and because your time is not free.
- Turnover costs. Cleaning, paint, small repairs and re-listing between tenants. Some of this hides inside the vacancy assumption and some does not — count the physical work in maintenance.
- Reassessed property tax. Many jurisdictions reassess on sale. Underwriting the seller's tax bill is one of the most expensive single mistakes in rental analysis.
- Rising insurance. Premiums in coastal, wildfire and hail-exposed markets have moved sharply. Get a real quote for the specific address rather than scaling from another property.
- The gap between scheduled and collected rent. An eviction costs far more than the empty months, once legal fees and damage are counted. That is what the credit-loss half of the vacancy assumption is for.
How cash flow relates to the other rental metrics
Cash flow is the most concrete number in rental analysis and the least complete. Everything else exists to fill in what it cannot see.
Cap rate stops one line above cash flow, at NOI, and divides by price instead of subtracting the mortgage. It describes the building; cash flow describes your month. Run both from the same operating statement using the cap rate calculator.
Cash-on-cash return takes this calculator's annual figure and divides it by the cash you invested, converting dollars into a comparable percentage.
The 1% rule and the 50% rule are screens, not analyses. The 1% rule asks whether monthly rent reaches 1% of price; the 50% rule assumes operating expenses run half of gross rent. Both exist to let you discard listings quickly, and neither survives contact with an actual tax bill. Use them at the one percent rule calculator and fifty percent rule calculator, then come back here.
One structural point about leverage: the mortgage is the only large expense in this statement that is fixed in nominal terms. Rents, taxes, insurance and repairs all tend to drift upward over a long hold while the payment on a fixed-rate loan does not. That asymmetry is why a rental at thin cash flow in year one often looks very different in year eight, and it is the strongest argument for fixed-rate debt on a long-term hold.