| Line item | Amount |
|---|---|
| Collected rent (after 5 percent vacancy) | 22,800 dollars |
| Less operating expenses | minus 7,800 dollars |
| Net operating income (NOI) | 15,000 dollars |
| Less mortgage (debt service) | minus 10,800 dollars |
| Less capital reserves | minus 1,200 dollars |
| Annual pre-tax cash flow | 3,000 dollars |
Glossary · Investment
Cash Flow
Cash flow is the money left from a rental property after all expenses are paid, including operating costs and the mortgage. It equals net operating income minus debt service and any reserves the owner sets aside. Positive cash flow means the property earns more than it costs to own; negative cash flow means the owner covers the shortfall out of pocket.
How is rental cash flow calculated?
Cash flow equals net operating income minus annual debt service, minus any capital reserves. Start with income, subtract operating expenses to get NOI, then subtract the mortgage payment and money set aside for future repairs to find what the owner actually keeps.
Written as a chain: gross income, minus vacancy, minus operating expenses, minus mortgage payment, minus reserves, equals cash flow. The order matters because each step removes a different type of cost.
Investors usually track cash flow monthly and annually. Pre-tax cash flow stops before income taxes; after-tax cash flow goes one step further and accounts for the owner's tax bill.
What is a good monthly cash flow?
There is no fixed target, but many rental investors aim for a positive figure with a comfortable cushion, sometimes framed as a minimum of roughly 100 to 200 dollars per unit per month. The right number depends on your goals, market, and risk tolerance.
A small positive number can vanish after one vacancy or repair, so build in reserves rather than counting every dollar as profit. Cash flow that barely clears zero leaves little margin for surprises.
Some investors accept thin or negative cash flow in high-growth markets, betting on appreciation and rent increases. That is a riskier strategy and depends on assumptions that may not hold. This is education, not investment advice.
What is the difference between cash flow and profit?
Cash flow is the actual money moving in and out each period. Profit, or taxable income, adjusts for non-cash items like depreciation and counts mortgage interest but not principal. A property can show positive cash flow yet a paper loss, or the reverse.
Depreciation lowers taxable profit without affecting cash, which is why real estate can produce spendable cash while reporting little or no taxable income. This gap is a core reason investors value rentals.
Mortgage principal reduces cash flow but is not a tax-deductible expense; it builds equity instead. Understanding the split helps you avoid confusing your bank balance with your tax return.
Worked example. For example, take a single-family rental renting for 2,000 dollars a month, or 24,000 dollars a year. After a 5 percent vacancy allowance you expect 22,800 dollars collected. Operating expenses such as taxes, insurance, and maintenance total 7,800 dollars, leaving 15,000 dollars of NOI. The mortgage costs 900 dollars a month, or 10,800 dollars a year, and you set aside 1,200 dollars in reserves. Annual cash flow is 15,000 minus 10,800 minus 1,200, or 3,000 dollars, about 250 dollars a month.
Common mistakes with Cash Flow
- Do not forget to budget for vacancy, repairs, and capital reserves, since ignoring them turns real cash flow negative fast.
- Do not count only rent minus mortgage; operating expenses like taxes, insurance, and management also reduce cash flow.
- Avoid confusing cash flow with taxable profit, because depreciation and principal payments make the two differ significantly.
- Do not treat appreciation as cash flow; unrealized gains do not pay monthly bills and only materialize on sale or refinance.
- Do not assume last year's cash flow repeats, because rents, taxes, insurance, and interest rates all change over time.
Related terms
Term
Net Operating Income (NOI)
A property's income after operating expenses but before mortgage payments and income taxes
Define TermCash-on-Cash Return
The annual pre-tax cash flow of an investment divided by the actual cash invested.
Define TermCapitalization Rate (Cap Rate)
A property's net operating income divided by its value, used to gauge investment return an
Define TermMultifamily Property
A building with multiple separate housing units, such as a duplex, triplex, or apartment b
DefineCash Flow FAQ
What is positive cash flow?
Positive cash flow means a rental brings in more money than it costs to own each period, after operating expenses, the mortgage, and reserves. The owner keeps the surplus. It provides ongoing income and a cushion against vacancies, repairs, and other surprises.
How is cash flow different from NOI?
NOI is income minus operating expenses and stops before the mortgage. Cash flow continues by subtracting debt service and reserves from NOI. NOI describes the property regardless of financing; cash flow reflects what a specific owner actually pockets after paying the loan.
Should I set aside reserves before counting cash flow?
Yes, ideally. Repairs and capital costs like roofs and appliances are inevitable, so prudent investors subtract reserves before calling anything profit. Counting reserves protects you from treating money you will soon spend as spendable income, which causes shortfalls later.
Can a property have negative cash flow but still be a good deal?
Sometimes, if strong appreciation, rent growth, or tax benefits outweigh the monthly shortfall. This is riskier because it relies on assumptions that may not hold, and you must fund the gap out of pocket. Weigh it carefully; this is not investment advice.
Is cash flow before or after taxes?
It can be either. Pre-tax cash flow is money left after operating expenses, the mortgage, and reserves but before income taxes. After-tax cash flow subtracts the owner's tax bill, which depreciation often reduces. Investors specify which version they mean when comparing deals.
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