How do I calculate rental property cash flow?

Cash flow follows one simple equation. Start with the rent and other income a property collects. Subtract everything you spend to operate and finance it. What remains is your monthly or annual cash flow.

• Gross income: rent collected plus fees, pet rent, or parking.
• Operating expenses: taxes, insurance, repairs, management, and any utilities you cover.
• Debt service: your mortgage principal and interest payment.
• Reserves: money set aside for vacancy and future repairs.

Income minus operating expenses gives net operating income. Subtract debt service and reserves from that, and you have true cash flow.

Optimistic math is the fastest way to buy a money losing rental. Rent minus mortgage is not cash flow. The gap between the two hides in costs that arrive irregularly but always arrive.

• Vacancy: no unit stays rented every single month, so budget for empty weeks.
• Capital repairs: roofs, water heaters, and appliances fail on their own schedule.
• Turnover: cleaning, paint, and listing costs between tenants.
• Management and admin: your time has value even when you self manage.

Set aside a monthly reserve for these. A rental that only clears when nothing breaks does not really cash flow.

A positive number means rent covers every cost and still pays you. That surplus is what you can reinvest, save, or spend. A negative number means you feed the property from your own pocket each month.

Negative cash flow is not always a mistake, since some investors accept it for appreciation or tax reasons. But you should choose it on purpose, with eyes open, not discover it after closing. Run the full formula before you buy, then track the real numbers after.

Cash flow is the input to almost every rental decision. It tells you whether to raise rent at renewal, refinance, hold, or sell. It also feeds return measures like cash on cash return, which compares annual cash flow to the cash you invested.

Track it monthly, not once a year. Small leaks, a creeping utility bill or slow rent collection, show up in monthly cash flow long before they surface on a tax return.

A portfolio total tells you almost nothing useful. Two properties averaging a healthy return can be one excellent property carrying one that quietly loses money every month, and you cannot see it until the numbers are split.

Split at least these, per property and per year: gross rent collected, vacancy loss, mortgage interest, taxes and insurance, repairs, capital improvements, and management cost including your own time. Then look at the two numbers that actually drive decisions:

• Cash flow. What lands in your account after everything, including the principal you paid, which is not an expense but is money you no longer have.
• Cost per unit per year of maintenance. A unit drifting well above your others is telling you something about the building, the tenant or the last contractor.

Work it through with the ROI and cash-flow calculator.

Schedule E has a fixed set of expense lines, and every hour you spend re-categorising in April is an hour you could have skipped by naming your categories after those lines in January. The lines are: advertising, auto and travel, cleaning and maintenance, commissions, insurance, legal and professional fees, management fees, mortgage interest, other interest, repairs, supplies, taxes, utilities, depreciation, and other.

Three category decisions that cause the most trouble:

• Repair or improvement. A repair is deducted this year; an improvement is capitalised and depreciated over years. Replacing a broken pane is a repair. Replacing every window is an improvement.
• Mortgage payment is not one expense. Only the interest portion is deductible; principal is not an expense at all.
• Deposits are not income. A security deposit you intend to return is a liability. It becomes income only when you keep it.

Related: can I deduct my own labor and the ROI calculator.