Is Your Cash Flow Really Positive? Here's How To Do The Math Right

May 14, 2025

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How Do I Calculate Cash Flow For a Rental Property?

When evaluating a rental property, cash flow is the first number that many investors look at. While it’s important to know how much you’ll make each month, it’s equally critical to understand what’s missing from that number. If you’re not factoring in future repairs and maintenance, vacancy periods, or unexpected expenses, your cash flow might look much better than it really is.

1. Gross Rental Income

Start with the gross rent you plan to charge your tenants. For example, if you’re renting a property for $1,500/month, that’s your gross income. You should also consider any other income, like parking fees, laundry fees, or other services you might provide, but rent is typically the bulk.

2. Operating Expenses

Now, subtract your operating expenses. This includes:

  • Property taxes

  • Insurance

  • Maintenance and repairs (routine fixes and upkeep)

  • Property management fees (if applicable)

  • Utilities (if you pay for them)

  • HOA fees, if applicable

3. Debt Service (Mortgage Payment)

Next, subtract your mortgage payment—the principal and interest portion of your payment. This is a critical component of the calculation and represents the financing cost of owning the property.

4. Capital Expenditures (CAPEX)

Here’s where many investors get caught. CAPEX refers to long-term expenses like:

  • Roof repairs

  • HVAC system replacements

  • Foundation work

  • Plumbing or electrical upgrades

These aren’t regular, monthly expenses—but they add up. Setting aside 5–10% of your monthly rental income for these expenses will help ensure you’re financially prepared when things break down.

5. Vacancy Loss

No tenant stays forever. Vacancy loss can be tough to predict, but on average, you should assume that you’ll have a vacancy rate of 5–10% per year (depending on the area). Be sure to account for this loss in your cash flow calculations.

6. Calculate Your Net Cash Flow

After subtracting all these expenses, you’ll arrive at your net cash flow. Here’s a basic formula:

Gross Rent Income – Operating Expenses – Debt Service (Mortgage) – CAPEX Reserve – Vacancy Loss = Net Cash Flow

Why Net Cash Flow Isn’t the Whole Picture

While cash flow is important, it’s far from the only benefit of owning rental property. In fact, net cash flow can be a misleading figure if you don’t factor in the long-term growth potential.

Other Benefits of Owning Rental Properties:

  1. Appreciation: Over time, your property could increase in value, especially in growing neighborhoods. This means a big payday when you sell, even if your monthly cash flow isn’t through the roof.

  2. Tax Benefits: You can deduct many expenses associated with owning rental property, like mortgage interest, property taxes, insurance, and even depreciation. This can reduce your taxable income significantly.

  3. Principal Paydown: With each mortgage payment, you’re paying down the principal, which builds equity in the property.

  4. Inflation Hedge: As inflation rises, rents often follow. This means that your rental income can grow over time, even if your fixed-rate mortgage remains the same.