Rental cash flow is the money left each month after every cost of owning and running the property. It is the number that decides whether a rental helps your finances or quietly drains them. The calculation has four stages, and skipping any one of them flatters the result.
Stage 1: effective gross income
Start with monthly rent, then subtract a vacancy allowance. A 5 to 10% allowance is standard: it reflects empty months, late payments, and turnover gaps. Example: rent of $1,800 with a 5% vacancy allowance ($90) gives effective gross income of $1,710. Using the full rent with no vacancy allowance is the most common beginner error, and it overstates every later number.
If the property is already rented with a strong tenant history, you might use 5%. For a new rental or a high-turnover area, use 8 to 10%. Be honest here; optimism at this stage compounds through the whole calculation.
Stage 2: operating expenses and NOI
Subtract operating expenses: property taxes, insurance, maintenance and repairs, property management, utilities you pay, and homeowner association dues. Example: taxes $250, insurance $120, maintenance $150, management $180, totalling $700. Net operating income (NOI) = $1,710 – $700 = $1,010 per month.
Keep a maintenance reserve even in good months. A roof, boiler, or appliance failure arrives as a lump sum, and properties without a reserve turn one bad month into a crisis. Many landlords budget 5 to 10% of rent for maintenance and capital reserves.
Stage 3: mortgage and cash flow
Subtract the mortgage payment (principal and interest) from NOI to get monthly cash flow. With a mortgage payment of $850: cash flow = $1,010 – $850 = $160 per month, or $1,920 per year. Positive cash flow means the property pays for itself and leaves a surplus. Negative cash flow means you subsidise it monthly, which is only defensible if you have a clear reason, such as strong expected appreciation.
Note what is excluded: the principal part of the mortgage payment builds your equity, so it is not truly lost, but it is still cash out each month. Cash flow measures cash, not total return.
Stage 4: cash-on-cash return
Cash-on-cash return = annual cash flow / total cash invested x 100. If you invested $45,000 as a deposit plus closing costs, the return is $1,920 / $45,000 = 4.27%. This lets you compare properties of different prices fairly, and compare property against other investments. A property with higher cash flow but double the cash invested can be the worse investment.
Re-run the numbers with stress tests: rent 10% lower, an extra month vacant, and a $2,000 repair. If the property survives all three without deep negative cash flow, it is robust. If one bad month breaks it, the margin is too thin.
Cash flow is only part of total return
Monthly cash flow understates a rental’s total return, because two other gains accrue silently. First, the tenant’s rent pays down your mortgage principal, building equity each month even when cash flow is thin. Second, the property itself may appreciate.
Example: cash flow $160 a month is $1,920 a year. Add principal paydown of roughly $200 a month ($2,400 a year) and 3% appreciation on a $300,000 property ($9,000 a year), and the total economic return is about $13,320 a year before tax and costs. That is why some investors accept thin cash flow on properties in growing areas, and why cash flow alone never tells the whole story.
Try it faster with the tool
You can follow every step above by hand, but the free Rental Property Cash Flow Calculator — Monthly Cash Flow and Cash-on-Cash Return After Every Bill does the arithmetic for you. Enter your numbers and it gives the answer right away, so you can check your hand calculation or skip straight to the result.
Quick tips
- Effective income = rent minus a 5-10% vacancy allowance.
- Cash flow = NOI minus mortgage principal and interest.
- Cash-on-cash = annual cash flow / total cash invested.