Rental cash flow is the money left over each month after you subtract every operating expense and the mortgage payment from the rent. Positive cash flow means the property pays you; negative means you feed it. Most beginners overstate it by forgetting expenses. Here's how to run the numbers honestly.
This is education, not investment advice.
The core formula
Monthly cash flow = Rental income − Operating expenses − Mortgage payment (debt service)
Simple in theory. The mistakes all live in the "operating expenses" you forget.
The expenses beginners skip
Rent minus mortgage is not cash flow. A real analysis subtracts all of this:
- Property taxes
- Insurance
- Property management (~8 to 10% of rent ... count it even if you self-manage, so the number is honest)
- Maintenance + repairs (budget a percentage of rent)
- Capital expenditures (CapEx) ... reserves for big-ticket items (roof, HVAC, water heater) that will eventually hit
- Vacancy ... set aside for the months between tenants
- Utilities you cover, HOA fees, etc.
Leave out CapEx and vacancy and your "cash-flowing" rental quietly loses money the first time the furnace dies.
A quick screen: the 1% rule
A fast filter (not a decision-maker): the 1% rule suggests monthly rent should be at least ~1% of the purchase price. A $150,000 property renting for ~$1,500/mo passes. It's a rough gate for whether a deal is worth deeper analysis ... nothing more. Like the 70% rule, it is a rule of thumb, not a law. We went looking for a primary source that sets a rent-to-price screen and found none, so treat anyone who calls it a standard the same way.
Measure the actual return: cash-on-cash
Cash flow in dollars is good; return on your invested cash is better for comparing deals. Cash-on-cash return = annual pre-tax cash flow ÷ total cash invested (down payment + closing costs + rehab). That is arithmetic, not a benchmark ... it needs no authority beyond the two numbers you put into it. Example: $6,000 annual cash flow ÷ $60,000 invested = 10%. What counts as a "good" cash-on-cash return is a separate question, and it is a practitioner convention with no primary source ... target ranges get quoted confidently, but no statute, regulator, or lender rule sets one. Use the number for what it actually does, which is comparing this deal against your other deals, and against what the same cash would do somewhere else.
What makes a property cash-flow
- You bought right. Cash flow starts at the purchase price ... overpay and no rent fixes it.
- Rent covers the full expense stack, not just the mortgage.
- Financing terms are sane (a huge payment kills cash flow ... relevant after a cash-out refinance).
- You can raise NOI ... net operating income is income minus operating expenses, so a modest rent increase, added value, or a trimmed expense all push the same number the same way.
The come-up move
Analyze rentals with the full expense stack ... taxes, insurance, management, maintenance, CapEx, and vacancy ... then check the cash-on-cash return on your real invested capital. Honest math up front is what keeps a "rental" from becoming a liability.
Start free on Squatters to learn rental analysis and the whole come-up ladder. Squat it. Fund it. Own it. 🦝