Cash flow, the money left over each month after every expense is paid, is the single most important number for most rental property owners, more important than appreciation or even cap rate, because it’s what determines whether the property supports itself or requires you to subsidize it out of pocket. Here’s exactly how to calculate it, and the expenses first-time investors most often forget.

The Cash Flow Formula

At its simplest: Cash Flow = Total Income − Operating Expenses − Debt Service (mortgage payment). The result can be positive, the property generates surplus cash each month, or negative, you’re paying out of pocket to cover the shortfall. A property can still be a reasonable investment with slightly negative cash flow if it’s appreciating strongly or you’re paying down a meaningful amount of principal each month, but most buy-and-hold investors aim for positive cash flow from day one, since relying on future appreciation to make a deal work is a much riskier bet.

Income: Be Conservative, Not Optimistic

Start with gross rental income, but don’t use 100% occupancy in your calculation. Apply a realistic vacancy rate, often 5 to 8% in stable markets, more in softer or more seasonal ones, to get effective rental income. If you’re also factoring in other income, parking, storage, laundry, pet fees, include it here too, but be conservative rather than using the most optimistic number a listing or seller’s pro forma suggests. Verify your rent assumption against actual comparable rentals currently on the market in the immediate area, not what a seller claims the property “could” rent for.

Operating Expenses: The Full List

This is where most new investors underestimate their numbers. A complete operating expense list includes property taxes, insurance, property management (typically 8 to 12% of collected rent if you’re not self-managing), routine maintenance and repairs (budget roughly 1% of property value annually as a baseline), capital expenditure reserves for big-ticket replacements like a roof, HVAC, or water heater (often another 5 to 10% of rent set aside monthly), HOA fees if applicable, utilities you cover rather than the tenant, landscaping or snow removal if not handled by the tenant, and a vacancy reserve to smooth out the months the unit sits empty. Add these up before you even get to the mortgage, this is your true cost of operating the property, and it’s typically 35 to 50% of gross rental income once everything is accounted for.

Mortgage Payments (Debt Service)

Debt service is your full monthly mortgage payment, principal and interest, and if they’re escrowed with the lender rather than counted separately above, property taxes and insurance too. This is usually the single largest expense on the property and the main lever you control through your financing choice, a larger down payment reduces the loan amount and monthly payment, directly improving cash flow, which is one reason some investors deliberately put more down on a rental than the legal minimum, trading a higher upfront cost for better monthly cash flow and lower risk.

A Worked Example

Say a property rents for $2,200 a month. After a 6% vacancy allowance, effective income is roughly $2,068. Operating expenses, property tax, insurance, maintenance reserve, capital expenditure reserve, and property management, might total around $850 a month. That leaves roughly $1,218 before the mortgage. If the mortgage payment (principal, interest, taxes, and insurance if escrowed) is $1,100, monthly cash flow is approximately $118, modest, but positive. This example shows why it’s easy to be misled by a quick “rent minus mortgage” calculation, $2,200 minus $1,100 looks like $1,100 a month in profit, but once realistic operating expenses are included, the real number is a fraction of that.

What Counts as “Good” Cash Flow

There’s no universal dollar figure that defines a good deal, since it depends on your market, the property’s price point, and your goals, but many investors use a rough benchmark of $100 to $300 or more in positive cash flow per unit per month as a starting target, with some adjusting that threshold up for higher-priced markets or down for markets with strong appreciation potential. More important than hitting a specific number is making sure your calculation is honest and complete, a property that looks like it cash flows $300 a month using optimistic assumptions can easily turn negative once real vacancy, maintenance, and capital expenses show up.

Making the Numbers Work in Your Favor

Cash flow is income minus every operating expense minus the mortgage payment, and the expenses most new investors forget, capital expenditure reserves, realistic vacancy, and property management if you won’t self-manage, are usually what separates an accurate projection from an optimistic one. Run the full calculation with conservative assumptions before buying, not just rent minus mortgage, and you’ll have a far more reliable picture of whether a property will actually support itself.