How rental cash flow is calculated
Every rental analysis follows the same chain, and it helps to see each link:
- Gross rent minus a vacancy allowance gives effective income.
- Effective income minus operating expenses (taxes, insurance, repairs, capital expenditures, management, HOA) gives net operating income, or NOI.
- NOI minus the mortgage payment gives cash flow.
The mistake that sinks most first deals is skipping step two. A property that rents for $2,400 with a $1,200 mortgage does not cash flow $1,200. After vacancy, repairs, reserves and management, a third to a half of the rent is usually gone before the lender is paid.
The four numbers that matter
- Monthly cash flow: what is left in your account each month.
- Cash-on-cash return: annual cash flow divided by the cash you put in. It measures how hard your down payment is working.
- Cap rate: NOI divided by the price plus any up-front repairs. It ignores financing, so it compares properties rather than loans.
- DSCR: NOI divided by annual mortgage payments. It tells you, and your lender, how much cushion the rent provides.
Quick screens: the 1% rule and the 50% rule
The 1% rule says monthly rent should be at least 1% of the purchase price. The 50% rule says operating expenses will run about half of the rent over time. Both are filters for deciding which listings deserve a full analysis, not substitutes for one.