How to Calculate Rental Property Cash Flow (With a Worked Example)

Cash flow is the number that keeps a rental investor in business. It's what's left each month after every expense and the mortgage payment. Most beginners miscalculate it the same way: they subtract the mortgage, taxes, and insurance from the rent and call the remainder profit. Then the water heater fails, the tenant moves out, and the "profit" disappears.

Here's how to calculate rental property cash flow properly, line by line, with a full example.

The formula

Cash flow = Gross income − Vacancy − Operating expenses − Debt service

Two intermediate numbers matter:

• Effective gross income (EGI) = gross rent + other income − vacancy.
• Net operating income (NOI) = EGI − operating expenses.

Then cash flow = NOI − debt service (your mortgage principal and interest).

Operating expenses don't include the mortgage, depreciation, or income taxes. Keeping NOI separate from financing lets you compare properties fairly and calculate the cap rate.

Step 1: Estimate rent from comps, not the listing

Find 3–6 comparable rentals with the same bedroom and bathroom count, similar size and condition, nearby, leased or listed in the last 60–90 days. Use the middle of the range. If the property is tenant-occupied, get copies of the leases and confirm the rent with tenant estoppel certificates.

Tip: Call two or three local property managers and ask what the home would rent for and how long it would take to lease. Their estimate is usually more realistic than online rent estimators.

Step 2: Budget vacancy

Even great properties sit empty between tenants. A 5–10% vacancy allowance is typical: 5% means about 18 empty days a year; 8% is about one month. Use local days-on-market data for rentals to choose.

Step 3: List every operating expense

CapEx is the expense people skip. Roofs, HVAC systems, water heaters, flooring, and appliances all wear out. Budget for them monthly so a $9,000 furnace is a planned withdrawal, not a crisis.

A quick CapEx reserve calculation:

Budget for management even if you self-manage. If the deal only works when your time is free, you've bought a part-time job.

Step 4: Calculate debt service

Use the actual loan quote: loan amount, rate, and term. Escrowed taxes and insurance are already counted in operating expenses, so use principal and interest only here.

Worked example: a single-family rental

Purchase price $200,000, 25% down ($50,000), $150,000 loan at 7.0% for 30 years.

At $200,000 this rental loses about $144 a month once you budget honestly. Many listings that look like "rent minus PITI equals $400" look like this when you add vacancy, repairs, CapEx, and management.

What would make it work?

• Lower price: At $175,000 (loan $131,250, payment about $873), cash flow becomes about −$19. Still not enough.
• Lower price plus higher rent after light updates: At $175,000 with rent of $1,850 after a $6,000 refresh, NOI rises to about $926 and cash flow is about +$53.
• More down payment improves cash flow but lowers your return on cash.

That's the real lesson: the purchase price decides cash flow far more than anything you do after closing.

Step 5: Calculate return on your cash

Cash-on-cash return = Annual cash flow ÷ Total cash invested

Total cash includes the down payment, closing costs, points, and make-ready repairs. In the $175,000 scenario: down payment $43,750 + closing costs $5,250 + refresh $6,000 = $55,000 invested. Annual cash flow $53 × 12 = $636. Cash-on-cash = 1.2%.

Low cash-on-cash returns are common at 2026 interest rates. Decide your own minimum before you shop, and remember the other return sources: loan paydown, appreciation (not guaranteed), and tax benefits from depreciation.

Step 6: Stress test

Change one input at a time and check whether you can still cover the bills from reserves:

• ☐ Rent 10% lower.
• ☐ Vacancy doubled for a year.
• ☐ Property taxes 20% higher after reassessment.
• ☐ Insurance 30% higher at renewal.
• ☐ A $10,000 repair in year one.

If two of these together would drain your reserves, renegotiate the price or pass.

Common cash flow mistakes

1. Using the seller's tax bill. Many counties reassess at sale; your bill may be higher.
2. Using an online insurance estimate. Get a real quote, especially in coastal, wildfire, or hail regions.
3. Counting other income you can't prove such as unused garage rent.
4. Ignoring owner-paid utilities in small multifamily properties.
5. Rounding vacancy to zero because the current tenant "has been there for years."
6. Treating CapEx as optional.

Why your lender's numbers look better than yours

If you apply for a DSCR loan, the lender calculates a debt service coverage ratio, usually as gross rent divided by PITIA (principal, interest, taxes, insurance, and association dues). In the $200,000 example, that's $1,750 ÷ ($998 + $230 + $115) = 1.30, which many lenders consider comfortable.

Yet your own cash flow is negative. The difference is that the lender's formula ignores vacancy, repairs, CapEx, and management. A loan approval tells you the lender expects to be repaid; it doesn't tell you the property will put money in your pocket. Always run your own full calculation alongside the lender's ratio.

Cash flow per door vs. cash flow on cash

Investors quote cash flow two ways, and both matter:

A property with $400 per door but 40% down might return less on your cash than one with $200 per door and 20% down. But the $400-per-door property survives a bad year far more easily. For a first rental, many investors prioritize cushion per door over a higher percentage return.

Turning the calculation into a habit

Put these inputs in a spreadsheet so each new listing takes five minutes:

• ☐ Price, closing costs, make-ready repairs
• ☐ Rent and other income
• ☐ Vacancy, repairs, CapEx, and management percentages
• ☐ Taxes (post-sale estimate), insurance quote, utilities, HOA
• ☐ Loan amount, rate, term, points
• ☐ Outputs: EGI, NOI, cash flow, cap rate, cash-on-cash, lender DSCR, break-even rent

After a year of owning, replace your percentage assumptions with your actual expense history. Your second analysis will be far more accurate than your first.

Your break-even rent

Finally, solve for the rent at which cash flow equals zero. In the $200,000 example, rent would need to be roughly $1,950 to break even after all reserves. Knowing your break-even rent tells you how much cushion you have if the market softens.

Your next step

Pick three active listings in a neighborhood you know and run them through these six steps with real tax figures and an insurance quote. Compare the cash flow you calculate with what the listing advertises; the gap is your education.

The full guide, Buying Your First Rental Properties, includes a complete rental analyzer, CapEx worksheet, DSCR loan comparison, BRRRR math, tenant screening criteria, lease checklist, landlord law basics, and a 30/60/90-day plan for your first purchase, for $0.99.