Rental property cash flow is a vital measurement that helps landlords understand the actual income generated from their investment properties once all costs are covered. These costs include mortgage payments, insurance, property taxes, repairs, and management fees. Positive cash flow means your rental earns more than it costs to operate, creating a steady income stream.
Why Cash Flow Is Important:
Investors often focus on a property’s appreciation potential, but cash flow offers reliable, immediate returns. It pays bills, funds repairs or unexpected expenses, and can be reinvested to grow your portfolio.
How to Calculate Rental Property Cash Flow:
- Gross Scheduled Income (GSI): Calculate total potential rental income if the property is rented 100% of the time.
- Effective Gross Income (EGI): Adjust GSI to account for expected vacancy and credit losses (usually 5–10%).
- Operating Expenses (OpEx): Subtract costs like property taxes, insurance, repairs, utilities, and management fees to find your Net Operating Income (NOI).
- Debt Service and Capital Expenditures: Subtract mortgage principal and interest payments plus savings for large repairs or replacements (CapEx).
The final figure is your monthly rental property cash flow.
Example:
- Monthly rent: $2,200
- Vacancy (5%): $110
- Operating expenses: $616
- Mortgage payment (P&I): $1,200
- CapEx reserve (5%): $110
Resulting in a positive cash flow of $164 per month.
Common Mistakes to Avoid:
- Ignoring vacancy and capital expenditures makes cash flow look better than reality.
- Underestimating repair costs, which typically run 5–10% of rent monthly.
- Confusing cash flow with profit; cash flow focuses strictly on actual cash in and out.
Learn More:
For details on taxes related to rental properties, see our guide on Property Income Evaluation. To understand mortgage impacts, visit Investment Property Mortgage.
Sources:
- IRS Publication 527: Residential Rental Property (https://www.irs.gov/publications/p527)
- NerdWallet: How to Calculate Cash Flow on a Rental Property (https://www.nerdwallet.com/article/investing/how-to-calculate-cash-flow)
- Investopedia: Cash Flow Definition and Examples (https://www.investopedia.com/terms/c/cashflow.asp)
This article is designed to provide a clear, practical overview to help you evaluate rental properties effectively and make informed investment decisions in 2025 and beyond.
