Rental Property Cash Flow: Formula & Worked Example

Some links are affiliate links. Rental Owner Studio may earn compensation from a qualifying action, at no additional cost to you. How our links work.

Rental property cash flow is collected income minus operating expenses and debt payments. To estimate cash you can safely take out, also allow for future major repairs. Rent minus the mortgage payment leaves out several costs that determine whether a rental actually supports itself.

Use the example below to build a monthly budget, then replace every assumption with evidence for your property.

The rental cash flow formula

Scheduled rent − vacancy and collection losses − operating expenses − loan payments − capital reserves = cash available before income taxes.

Net operating income, or NOI, stops before loan payments and capital reserves. Keeping those lines separate makes it easier to compare the building itself with the financing you choose.

A worked monthly cash flow example

This hypothetical rental costs $200,000. The buyer puts 25% down and finances $150,000 at 7.5% over 30 years. This rate is an illustration, not a lender offer.

The property brings in $2,000 of scheduled rent but leaves about $121 per month after these allowances. Annualized, that is about $1,454. An unexpectedly large repair or longer vacancy can still exceed the amounts set aside.

How to choose realistic inputs

Start with comparable rentals

Compare homes with similar bedrooms, bathrooms, size, condition, parking and included utilities. A renovated listing with a garage is not a direct comparison for a dated home without one. Asking rents are useful evidence, but a listing that has sat vacant for weeks may be overpriced.

Research rent estimates and comparable rentals with RentCast, then confirm the estimate against local listings and leasing activity. This is an affiliate link.

Separate recurring bills from irregular work

Obtain an insurance quote, check the tax assessment process and list owner-paid services. Budget routine repairs separately from replacement of expensive components. Avoid counting the same cost once as a repair allowance and again as a capital reserve.

Read the loan terms carefully

Use principal and interest in the debt-payment line. If the payment quoted by your lender includes escrow for taxes and insurance, separate those amounts so you do not subtract them twice. An amortization period determines the scheduled payment; a balloon date determines when a remaining balance becomes due.

What changes if you manage the property yourself?

In the example, removing the $160 management allowance would increase cash remaining to about $281 per month. That does not make the work disappear. Show both versions: cash flow while you do the work and cash flow if someone else takes over. The second version helps you judge whether the investment fits your long-term plans.

Stress-test the result before buying

Change one assumption at a time so you can see the source of risk. Reduce rent by 5%, increase insurance, or test a larger vacancy allowance. Then combine a few unfavorable assumptions. Do not count an annual vacancy allowance and the same vacant month twice within one scenario.

For this example, one additional unpaid month beyond the budgeted allowance means $2,000 less annual income before any offsetting variable costs. That is larger than the base-case annual cash remaining. A positive monthly estimate can still have a small margin for error.

Is $100 a month good cash flow?

There is no useful universal answer without knowing the cash invested, condition, risk and workload. A small surplus on a property with aging systems may be less attractive than a similar surplus on a newer home with lower near-term repair needs. Compare the annual cash return with the total money tied up using the cash-on-cash return calculator.

Common mistakes that overstate rental cash flow

• Using twelve fully paid months without a vacancy allowance.
• Counting rent growth that has not happened yet.
• Forgetting management, HOA charges or owner-paid utilities.
• Calling the full mortgage payment an expense and then subtracting escrowed taxes and insurance again.
• Leaving roofs and mechanical replacements out of the plan.
• Treating principal paydown or appreciation as spendable monthly income.

Keep a record of the assumptions you used. After purchase, compare the estimate with actual collected income and expenses each month. The difference tells you which part of your analysis needs to improve.

Educational guide. Examples are illustrative and depend on your inputs. Check property-specific costs and applicable requirements before acting.