The steps

  1. Start with yearly rent: monthly rent x 12.
  2. Subtract vacancy, the rent you will not collect.
  3. Subtract operating costs: property tax, insurance, repairs, capital expenses, management, HOA and utilities you pay.
  4. The result is net operating income (NOI).
  5. Subtract the loan payments (principal and interest) for the year.
  6. What remains is yearly cash flow. Divide by 12 for monthly.
Cash flow = NOI - annual loan payments

Worked example

Starting numbers from the calculator: price $450,000, 25% down, 6.75% for 30 years, rent $4,600 a month, 5% vacancy, tax 1.1% of price, insurance $2,400, repairs 5% and capital expenses 5% of rent, management 8%, utilities $100 a month.

  • Gross rent: $55,200. Vacancy: $2,760. Collected: $52,440.
  • Operating costs: $18,265 (tax $4,950, insurance $2,400, repairs $2,760, capital expenses $2,760, management $4,195, utilities $1,200)
  • NOI: $34,175
  • Loan: $337,500. Payment $2,189 a month, or $26,268 a year.
  • Cash flow: $34,175 - $26,268 = $7,907 a year, about $659 a month

Cash in the deal is $131,000 (down payment, closing and $5,000 up front). Cash flow on that is a 6.04% cash-on-cash return. The cap rate is 7.59% and the DSCR is 1.30.

Do not skip these

  • Repairs and capital expenses. Roofs and appliances wear out even when nothing is broken today.
  • Vacancy. Units sit empty between tenants.
  • Management. Even if you do the work yourself, your time has a price.

When it misleads

  • It is a year-one estimate. Rent and costs change over time.
  • Positive cash flow does not mean a good deal if the price or repairs are too high.
  • It leaves out taxes on your income and the principal you pay down.

Pair it with the cap rate and DSCR to see the deal from more sides.

Try the rental cash flow calculator with your own numbers. It also finds the rent where cash flow is zero.

FAQ

Is NOI the same as cash flow?

No. NOI is before the loan payment. Cash flow is after it.

Does cash flow include the mortgage principal?

Yes, the payment counts in full. The part that pays down the loan builds equity, but it still leaves your pocket each month.

What is break-even rent?

The rent at which yearly cash flow is zero. The calculator shows it.