How do you know if the property you want to buy will cash flow? As a new real estate investor, knowing how to calculate cash flow correctly will help you determine if it is a good investment. Investing in real estate can be an excellent way to build wealth and generate passive income for Latinas. However, before you jump in, it’s crucial to thoroughly analyze potential rental properties to ensure they’ll provide positive cash flow. In this comprehensive guide, I will walk you through the essential steps on how to calculate cash flow.
Key Takeaways
- Cash Flow is your Monthly Rental Income minus all expenses.
- Include vacancies, repairs, capital expenses, mortgage, and any other expenses.
- Calculating cash flow helps you determine if a property can support itself and bring in income.
- Use current rents, not what you hope to achieve in the future.
- Always include property management even if you plan to self-manage.
What is rental property cash flow?
Quick answer: Rental property cash flow is the money left after you subtract every monthly property expense from the income the rental produces.
As a new real estate investor, understanding how to calculate cashflow is important. It is not just subtracting the mortgage from the monthly rental income. This misconception has gotten many new investors in trouble. Matter-of-fact you will see wholesalers and other sellers promote “deals” with high “cash flow,” but their analysis is wrong. The good news is that you do not need to be a math genius. You need a complete list of income and expenses, realistic assumptions, and the patience to check the numbers before making an offer.
Cash flow refers to the net profit you receive from a rental property. It is a calculation of your monthly gross rental income minus all your operating expenses.
| Cash flow = Gross Monthly Rental Income – All Monthly Expenses |
What are monthly expenses?
When calculating cash flow, you include monthly expenses. This includes:
- Operating Expenses
- Vacancies
- Capital Expenses
- Mortgage/Debt Payments
- Insurance & Taxes (if not included)
Cash flow can be positive, where you are making a profit, or negative, where your expenses are greater than your rental income. Of course, in real estate investing, the goal is to have positive cashflow.
Although, we are going to get into how to manually calculate cash flow, you can get my free Rental Property Calculator in my free Rental Property Investing Starter Kit. Get yours by clicking below!
Rental property cash flow versus Net Operating Income (NOI)
Beginner investors may mix up cash flow with net operating income (NOI). But NOI is the first part of calculating cash flow. It is understandable to feel overwhelmed. In real estate investing there are a bunch of new terms to learn. You can get a quick crash course in this Real Estate Investing Terms guide.
| Net Operating Income = Gross Rental Income – Operating Expenses |
What is Gross Rental Income and what does it include?
Gross rental income is all the income that your rental property generates. This is before you deduct any expenses. For example, it can include:
- Monthly Rents
- Pet Rent
- Utilities
- Laundry
- Parking Fees
- Late Fees
What are Operating Expenses?
Operating expenses include any expenses that you accrue while maintaining or operating your rental property. The most common operating expenses include:
- Mortgage, Taxes, Insurance: A mortgage will include property taxes and insurance.
- Maintenance & Repair Costs: Routine maintenance of the home (lawn care, air filters) or repairs needed (plumbing, drywall)
- Management Fees: Property Manager fees, legal fees (leases, evictions, court fees), or software needed to collect rent or screen tenants.
How to calculate rental property cash flow step by step
1. Estimate your monthly rental income
Start by researching the rental market in your target area to determine the potential rental income for similar properties. What rents can you expect today? Do not use rents that you hope to receive in the future!
Look at online listings, speak with your team members like your real estate agent or property manager. You can also use sites like City-Data.com to get an idea of how much rent you may be able to charge. Remember, to consider factors like location, property size, and amenities. Aim for rental income that comfortably covers your expenses and leaves room for profit.
Pro Tip: Conduct a market analysis and set rents in the middle. This will help you be competitive but also bring in quality tenants.
2. Deduct fixed Operating Expenses
Next, calculate the operating expenses associated with the property. Fixed expenses are costs that are relatively predictable, even when the property is vacant.
Common fixed rental property expenses include:
- Property Taxes & Insurance.
- HOA dues
- Property Management Fees
- Software & Subscriptions
- Other expenses required regularly
Be careful not to count taxes and insurance twice. If they are included in your mortgage payment, do not subtract them again as separate expenses.
Whenever possible, use actual records. For property taxes you can get an estimate of the tax rate and calculate it for the purchase price.
3. Estimate maintenance and repairs
A property will require preventative maintenance routinely. When including it in cash flow, use percentage of the rental income. Depending on the age of the property and any upfront repairs/updates you make, it can range from 5%-10%. As you buy more and get familiar, you can adjust.
Do not skimp on maintenance and repairs. You may save a dollar now but it will become a bigger problem later and cost way more. The same goes for repairs. You should account for repairs and maintenance even if you don’t have one that month. Put it in a fund for a rainy day.
4. Add reserves for Capital Expenditures (CapEx)
Capital expenditures (CapEx), include major improvements or expenses. This can include HVAC, water heater, windows, exterior paint, major appliances and more. This is also a percentage (avg 10%) of the rental income or can be a set number that you set aside each month.
For example:
You purchase a property where the roof has around 15 years of life left. You know it can cost about $15,000. You can break up the expense into monthly increments.
| 15,000 ÷ 15 years ÷ 12 months = about $83 per month |
Repeat this for the major systems you want to plan for, then combine the amounts.
Pro Tip: Use the property inspection and/or contractor quotes to help you estimate.
5. Other expenses to include
- Mortgage or Debt Service
- Vacancies: Include a percentage (5%-8%) of the monthly rental income, to set aside in case of vacancies.
- Property Manager. Even if you self-manage, you want to include it just in case.
Use a lender estimate based on a realistic loan amount, interest rate, term, and closing date. A generic mortgage calculator is useful for early screening, but a lender quote is stronger before making an offer.
Rental property cash flow example
Now let’s put it all together with an example.
Scenario:
You found a single family home and want to determine if it will be cash flow positive, and if so, by how much? Based on your rental market analysis, you expect to receive $2,300 per month. Let’s view how different the cash flow is based on the old way (rent-mortgage) and actual cash flow calculation.
Old way:
$2,300-$1,200 = $1,100 estimated cash flow
Cash flow calculation:
| Gross rent | $2,300 |
| Property Management Fees (10%) | -$230 |
| Vacancy (8%) | -$184 |
| Maintenance & Repairs (8%) | -$184 |
| CapEx (8%) | -$184 |
| Mortgage (Includes Taxes & Insurance) | -$1,200 |
| Estimated monthly cash flow | $318 |
As you can see, there is a huge difference between the two. Although, the result is positive cash flow, you can see how calculating the cash flow wrong can set you up for failure. A wholesaler or seller may state that you will bring in $500 in cash flow. But when you run the numbers, you are cash flow negative.
How much is good cash flow?
But it is only $318 per month! Is that good cash flow? To understand whether or not it is good cash flow depends on several factors.
Are you comfortable with it?
What is realistic in your market?
How much money you used to acquire it? We call this cash-on-cash (CoC) return. It is a ratio of the amount of money you used to acquire the property and how much you are receiving every year.
| CoC return = Annual cash flow ÷ total cash invested × 100 |
However, don’t get too lost in the technical. The goal is to become financially free. A cash flow of $318 may not seem much, but what bill can it cover?
Cash flow is part of the big picture
As a new real estate investor, you may be tempted to go after the big fish, the highest cash flow. However, do not let that keep you on the sidelines. Many wait forever for the “perfect deal.” Let me tell you that you will be waiting for some time.
Instead, focus on chipping away at your personal expenses. The goal is to become financially free. A cash flow of $318 may not seem much, but what bill can it cover? Now continue buying a rental property for each bill, and you will gain financial independence.
Additionally, don’t forget about the other benefits. You are reducing your tax liability. You have an asset which brings in income and increases in value. You can leverage the equity to buy more or to fund other projects. Remember you don’t have to do it all at once. Take it one step at a time.
Do not let perfectionism convince you that you need to know everything before practicing. Analyze one property, then another, then another. Confidence comes from repetition.
Learn rental property investing with comunidad
If this breakdown felt overwhelming or need support, remember you are not alone! Join the free Latinas in Real Estate Investing community on Skool for rental property fundamentals, deal analysis, rental strategies, ethical landlording, and support from a comunidad that understands why you are building wealth.
Frequently asked questions about rental property cash flow
How do you calculate cash flow on a rental property?
Add all realistic monthly rental income. Subtract vacancy, taxes, insurance, maintenance, repairs, CapEx reserves, management, HOA dues, owner-paid utilities, services, and the mortgage payment. The remaining amount is estimated monthly cash flow.
What expenses should be included in rental property cash flow?
You want to account for all expenses required to own and operate the property. Common expenses include vacancy, taxes, insurance, management, routine maintenance, capital replacements, utilities, HOA dues, licensing, lawn care, pest control, bookkeeping, and debt payments.
Is $200 a month good cash flow for a rental property?
It depends on the amount invested, property risk, local market, workload, condition, and your goals. Two hundred dollars may be reasonable for one deal and inadequate for another.
What is positive cash flow in real estate?
Positive cash flow means the property’s income is greater than its expenses, reserves, and mortgage payments.
Should I include vacancy if the property is occupied?
Yes. It may be occupied now, but they may decide to move. Set aside monthly reserves for those occasions. Study your market to know what is the typical timeframe to find a new tenant.
