Rental property cash flow is the rent that’s left each month after you subtract a vacancy allowance, the operating expenses (taxes, insurance, maintenance, management, and so on), and the mortgage payment. NOI excludes the mortgage; cap rate compares annual NOI with the property price; cash-on-cash return compares annual cash flow with the cash you invested. Those differences matter when two properties have different loans.
The example below uses one hypothetical property throughout. It includes a vacancy allowance and keeps mortgage principal and interest separate from taxes and insurance.
The example property
A single-family rental bought for $250,000 with 20% down and a 30-year mortgage at 6.5%. The tenant pays $2,100 a month. The owner self-manages and pays for lawn care; the tenant pays utilities.
| Input | Value | Assumption |
|---|---|---|
| Purchase price | $250,000 | |
| Down payment | $50,000 | 20% |
| Closing costs and initial repairs | $8,000 | Paid at purchase, not financed |
| Loan amount | $200,000 | Price minus down payment |
| Mortgage payment (principal + interest) | $1,264.14 | 30 years at 6.5% |
| Monthly rent | $2,100 | Current lease |
| Vacancy reserve | 5% | Roughly 2–3 weeks empty per year |
| Property taxes | $250 / month | $3,000 / year |
| Insurance | $110 / month | $1,320 / year landlord policy |
| HOA | $0 | None |
| Maintenance reserve | $150 / month | About 7% of rent |
| Property management | $0 | Self-managed |
| Owner-paid utilities | $0 | Tenant pays |
| Other | $40 / month | Lawn care |
Two assumptions worth flagging. The mortgage figure is principal and interest only — taxes and insurance are listed separately below, so they’re not also hidden inside the payment. And the 5% vacancy reserve is a planning number, not a prediction; use your own vacancy history and local leasing conditions to choose an allowance.
Step 1: Effective income after vacancy
Gross rent × (1 − vacancy rate).
$2,100 × 0.05 = $105 vacancy reserve
$2,100 − $105 = $1,995 effective monthly income
A month of vacancy every two years spreads to $2,100 ÷ 24 = $87.50 a month. This example allows $105 for lost rent. Cleaning, repairs, and other turnover costs belong in the expense budget separately.
Step 2: Operating expenses
Add everything it costs to run the property that isn’t the loan.
| Expense | Monthly |
|---|---|
| Property taxes | $250 |
| Insurance | $110 |
| HOA | $0 |
| Maintenance reserve | $150 |
| Property management | $0 |
| Utilities | $0 |
| Other (lawn) | $40 |
| Total operating expenses | $550 |
Notice what’s not here: the mortgage. Operating expenses are the costs you’d have even if you owned the property outright. That separation is what makes NOI and cap rate comparable between properties with different financing.
Step 3: Net operating income (NOI)
Effective income − operating expenses.
$1,995 − $550 = $1,445 monthly NOI
$1,445 × 12 = $17,340 annual NOI
Step 4: Monthly cash flow
NOI − mortgage payment.
$1,445 − $1,264.14 = $180.86 monthly cash flow
$180.86 × 12 = $2,170.32 annual cash flow
This is projected cash left after the listed costs and reserve, before income tax and major capital replacements. The $150 monthly maintenance allowance already sets aside $1,800 a year. A repair paid from that reserve should not also be subtracted from cash flow as though nothing had been budgeted for it.
Step 5: Cap rate
Annual NOI ÷ purchase price.
$17,340 ÷ $250,000 = 0.06936 → 6.9% cap rate
Cap rate ignores financing, which is the point: it tells you what the property earns as a property. It’s the number to use when comparing this deal to another one bought with different leverage.
Step 6: Cash-on-cash return
Annual cash flow ÷ cash actually invested.
Cash invested = $50,000 down + $8,000 closing and repairs = $58,000
$2,170.32 ÷ $58,000 = 0.03742 → 3.7% cash-on-cash return
The loan’s 6.5% interest rate is lower than the 6.9% cap rate, but interest is only part of the mortgage payment. Annual principal and interest total $15,169.68, or about 7.6% of the $200,000 loan. That debt service and the $8,000 of upfront costs help explain the lower cash-on-cash result. Principal paydown and appreciation are not cash received in this calculation.
Step 7: Break-even occupancy
(Operating expenses + mortgage) ÷ gross rent.
($550 + $1,264.14) ÷ $2,100 = 0.864 → 86.4%
The property covers its costs as long as it collects at least 86.4% of gross rent over the year — roughly 10.4 months of the 12. Below that, the owner must cover the shortfall. This estimate holds expenses fixed and assumes occupied months collect the full rent; it is a simplified planning measure.
The full picture
| Metric | Value |
|---|---|
| Effective monthly income | $1,995.00 |
| Operating expenses | $550.00 |
| Monthly NOI | $1,445.00 |
| Mortgage (P&I) | $1,264.14 |
| Monthly cash flow | $180.86 |
| Annual cash flow | $2,170.32 |
| Annual NOI | $17,340.00 |
| Cap rate | 6.9% |
| Cash invested | $58,000.00 |
| Cash-on-cash return | 3.7% |
| Break-even occupancy | 86.4% |
You can calculate this property’s cash flow with these exact inputs — the calculator uses the same formulas and shows each step — then change one number at a time to see what moves the result. Raising rent $100 adds $95 of monthly cash flow (after the 5% vacancy allowance); adding an 8% property manager subtracts $168 and takes cash flow to roughly $13.
Don’t count escrow twice
If your lender collects taxes and insurance with the mortgage, the example payment would be $1,624.14: $1,264.14 principal and interest, $250 taxes, and $110 insurance. Enter $1,264.14 in the mortgage field, then enter taxes and insurance in their own expense fields. Entering the full payment and those expenses would count escrow twice. Entering only the full payment would give the same cash flow, but overstate NOI and cap rate.
To find the P&I portion, look at the loan’s amortization schedule or the “principal and interest” line on the mortgage statement.
Other things to be honest about
- Maintenance reserve. $150 a month is about 7% of rent; older properties or ones with aging systems warrant more. The reserve reduces the cash available to spend, but setting money aside is not itself a repair expense. Here it stands in for estimated maintenance; reconcile it with actual spending.
- Capital expenses. A roof or HVAC replacement is not in the monthly numbers above. Some investors add a separate CapEx reserve; if you don’t, know that the cash flow figure is before those.
- Income taxes and depreciation. Cash flow is pre-tax. Taxable rental income is a separate calculation. For example, the IRS distinguishes deductible mortgage interest from principal payments. See IRS Publication 527; do not use this cash-flow total as the taxable-income figure.
- Your time. Self-managing saves the $168 but costs hours. If you’d otherwise be paid for those hours, price them.
Using the number once you own the property
Cash flow projections assume rent arrives on time and in full. The actual figure each month depends on whether it does. Once a property is rented, use a rent ledger to track rent due, received, and outstanding. Keep an expense record alongside it; the rent ledger alone cannot tell you actual cash flow. Our guide to keeping track of rent payments covers the monthly routine.
gather the P&I payment, annual tax and insurance bills, and current rent for one property, and calculate its cash flow. Then try a vacancy month or a larger repair budget and see how much cash you would need to cover the shortfall.
