How to Calculate Rental Property Cash Flow
Rental cash flow is what is left of the rent after vacancy, running costs and the mortgage. Work through it in steps, and it is easy to see where the money goes.
The steps
- Start with the rent you expect to charge for the year.
- Subtract an allowance for vacancy.
- Subtract the running costs of the property.
- That leaves net operating income, or NOI.
- Subtract the year's mortgage payments, principal and interest.
- What remains is cash flow, before income tax.
A worked example
A $300,000 property with a 25 percent down payment and a 6.5 percent 30-year loan, renting for $2,400 a month. These are example figures, not a forecast.
| Rent for the year ($2,400 × 12) | $28,800 |
| Less vacancy (5 percent) | -$1,440 |
| Rent collected | $27,360 |
| Less property tax | -$3,600 |
| Less insurance | -$1,200 |
| Less property management (8 percent of rent collected) | -$2,189 |
| Less maintenance (5 percent) | -$1,368 |
| Less capital reserve (5 percent) | -$1,368 |
| Net operating income | $17,635 |
| Less mortgage payments (12 × $1,422) | -$17,066 |
| Annual cash flow | $569 |
That is about $47 a month. A small margin like this can disappear with a slow month or an unexpected repair.
What each line means
- Vacancy. Time when the property is empty between tenants. Use figures from your local market. The example uses 5 percent only to show the method.
- Property tax and insurance. Look up the real tax bill and get an insurance quote. Both vary widely between places.
- Management. Even if you manage it yourself, many people include a figure, because your time has a value and you may hire help later.
- Maintenance and reserves. Money set aside for repairs and for big items such as a roof or heating system. It is a cost even in a year when you do not spend it.
- Mortgage payment. Principal and interest, from your lender's quote. The calculator uses the standard loan formula.
Common mistakes
- Leaving out vacancy or reserves, which makes the numbers look better than they are.
- Using the asking rent instead of what comparable properties actually rent for.
- Forgetting closing costs and repairs when you work out the cash you put in. They do not affect cash flow, but they matter for the return.
- Counting the principal paid on the loan as cash flow. It builds equity, but it is not money you can spend.
From cash flow to a return
Dividing cash flow by the cash you invested gives the cash-on-cash return. See the guide on cash-on-cash return. The rental property calculator does all of this for you and lets you change any input. This guide is general information, not financial advice.
Related
Questions
Is the principal part of the mortgage payment a cost?
It reduces your cash flow, because you pay it each month. It also builds your equity, so it is not lost, but it is not money you can spend. The calculators on this site subtract the full payment of principal and interest.
How do I estimate maintenance?
Use your own market and the age and condition of the property, and look at real repair bills if you can. The example uses 5 percent of rent collected only to show the method. Older properties generally need more.
What if I manage the property myself?
Many people still include a management figure, because your time has a value, and you may hire someone later. Leaving it out makes cash flow look better than it would be with help.
Is cash flow before or after income tax?
Before. Income tax depends on your own situation, so it is not included. Ask an accountant how rental income is taxed where you live.