How to Calculate Cash Flow on a Rental Property

What Rental Property Cash Flow Actually Means

Cash flow is the money left over each month after every dollar going out has been accounted for. Not rent minus mortgage. Not rent minus mortgage and taxes. Every dollar out — including the ones that don't show up on a listing sheet.

Positive cash flow means the property puts money in your pocket each month. Negative cash flow means you're subsidizing the property. Both can be part of a legitimate investment strategy — but only if you know which one you're dealing with before you buy.

The formula looks simple:

Step 1: Start With Gross Rental Income

Your starting point is the monthly rent the property generates — or would generate at current market rates. If the property is tenanted, verify the rent against local comps. A seller-occupied property or one with a long-term below-market tenant will need a rent adjustment before your numbers mean anything.

For a small multifamily, add up all units and use market rent, not what the current lease says:

• Unit 1: $1,150/month
• Unit 2: $1,200/month
• Unit 3: $1,100/month
• Gross Monthly Rent: $3,450

That's your ceiling. Everything from here reduces it.

Step 2: Apply a Vacancy Allowance

No property stays 100% occupied indefinitely. A standard vacancy allowance for most US markets is 5–10% of gross rent. Use the higher end for C-class properties or markets with less demand.

Using 8% on $3,450/month: $3,450 × 0.08 = $276/month vacancy → Effective Gross Income: $3,174/month

This isn't pessimism. It's what the property will realistically collect when averaged across a full year.

Step 3: Calculate Your Operating Expenses

This is where cash flow calculations live or die. Work through each category carefully — these are the numbers sellers and listing agents consistently leave out.

Steps 4 & 5: NOI and Cash Flow — The Full Waterfall

Once you have your expenses, the calculation flows in a straight line from gross rent down to monthly cash flow. Here's the complete picture for the three-unit example.

Step 6: Evaluate the Return — Cash-on-Cash

Cash flow tells you the monthly dollar amount. Cash-on-cash return contextualizes it as a percentage of what you actually deployed.

Cash-on-Cash Return = (Annual Cash Flow ÷ Total Cash Invested) × 100

For this deal: down payment ($80,000) + closing costs (~$9,600) = $89,600 total cash in. Annual cash flow: $91 × 12 = $1,092.

$1,092 ÷ $89,600 × 100 = 1.22% cash-on-cash return

That's a low return on deployed capital. Many experienced investors target 6–10%+. Here's how that compares:

What Counts as Good Cash Flow on a Rental Property?

The old rule of thumb is the 1% rule: monthly rent should equal at least 1% of the purchase price. On a $320,000 property, you'd want $3,200/month in rent. In most US markets right now, that's a high bar to clear.

A more practical benchmark: aim for $100–$200 net cash flow per unit per month as a minimum threshold. That's modest but meaningful — it keeps the property from costing you money and builds in a small buffer.

How interest rates reshape the entire calculation

The mortgage payment is often the single biggest variable in cash flow — and it swings dramatically with rate changes. Here's what a $240,000 loan looks like at different rates:

The difference between 5% and 7.25% on this loan is $349/month — the difference between a strong cash flowing deal and a barely-breaking-even one. Always model at current market rates, not historical averages.

Run Your Numbers Before the Market Runs Ahead of You

In a competitive market, the temptation is to move fast and figure out the details later. Don't. The calculation above takes 20 minutes with accurate inputs. The cash flow calculator above does it in seconds — plug in your property's rent, expenses, and loan terms to see monthly cash flow, NOI, and cash-on-cash return side by side.

Know your numbers. Then make your move.

FAQ: Rental Property Cash Flow Questions