Cash Flow
Cash flow is what remains after every expense is paid — operating costs, vacancy, and mortgage. It is the number most new investors focus on first, and for good reason: negative cash flow means the property costs you money every month regardless of whether it appreciates.
On a leveraged rental, cash flow = NOI − annual debt service.
Cash flow vs. NOI
These are often confused. The key difference:
| Metric | Includes debt service? | Use it for |
|---|---|---|
| NOI | No | Comparing properties; calculating cap rate and DSCR |
| Cash flow | Yes | Evaluating whether this deal works for you given your loan terms |
The same property can look great on cap rate but produce negative cash flow if the purchase price, down payment, or interest rate is unfavorable. Always model both.
The formula
Annual debt service = 12 × monthly mortgage payment (principal + interest only — taxes and insurance are already in NOI as operating expenses if you pay them separately, or in the mortgage escrow).
Worked example
Using the same $160,000 property from the NOI example:
| Item | Amount |
|---|---|
| NOI | $11,548 |
| Loan amount | $120,000 (25% down) |
| Interest rate | 7.0% / 30-year fixed |
| Monthly mortgage (P&I) | $799 |
| Annual debt service | $9,588 |
| Annual cash flow | $1,960 |
| Monthly cash flow | $163 |
$163/month is thin. Whether that is acceptable depends on your goals — if you are counting on appreciation and equity paydown, $163 buys insurance against negative cash flow. If you need cash flow now, you would want to negotiate a lower price or put less focus on this market.
Cash flow stress test
Never underwrite to the best case. Run three scenarios:
| Scenario | Vacancy | Rent | Monthly CF |
|---|---|---|---|
| Base case | 8% | $1,800 | $163 |
| Vacancy spike | 12% | $1,800 | $97 |
| Rent shortfall | 8% | $1,700 | $69 |
| Worst case | 12% | $1,700 | $3 |
If the worst case turns the property negative, decide whether you can sustain that for 6–12 months. If not, you either need a better price, a lower mortgage rate, or a different market.
What drives cash flow
Cash flow is sensitive to four variables in roughly this order:
| Driver | Impact on monthly CF if it worsens by 1 unit |
|---|---|
| Rent (per $100 decrease) | − $92/month (after vacancy and mgmt adjustments) |
| Interest rate (per +0.5%) | − ~$37/month on $120,000 loan |
| Vacancy (per +1%) | − $15/month |
| Operating expenses (per +$1,000/yr) | − $83/month |
Rent assumptions and financing terms drive cash flow far more than small operating expense adjustments.
Common mistakes
1. Confusing NOI with cash flow. Sellers sometimes present NOI as "cash flow." They are not the same. If a seller's pro forma does not show a debt service line, it is presenting NOI, not cash flow.
2. Modeling at today's rent without accounting for vacancy. Assuming 12 months of full rent every year ignores turnover, lease-up periods, and economic vacancy. Eight percent vacancy on $1,800/month rent is $144/month of lost income.
3. Using the gross mortgage payment (PITI) vs. P&I. If property taxes and insurance are in escrow and you're also deducting them as operating expenses, you are double-counting. Use P&I only in the debt service line; list taxes and insurance separately under operating expenses.
4. Ignoring capital reserves. A $0 cash flow property with no reserve line is almost certainly cash-flow negative when you factor in realistic capital spending. Reserve for the roof, HVAC, and appliances.
How cash flow connects to other metrics
| Metric | Relationship to cash flow |
|---|---|
| NOI | Cash flow = NOI − debt service |
| DSCR | DSCR = NOI ÷ debt service (above 1.0 = positive cash flow) |
| Cash-on-cash return | Annual CF ÷ total cash invested |
| Cap rate | Does not include debt service — compare to understand leverage effect |
Frequently asked questions
What is considered good cash flow on a rental property? There is no universal benchmark. Common targets among beginner investors are $100–$300/month per door, but the right number depends on your market, deal type, and investment goals. In high-appreciation markets, investors sometimes accept $0–$50/month. In cash-flow markets, $200–$400/month is more typical.
Can a property have good cap rate but negative cash flow? Yes. If the market cap rate is 6% and your mortgage requires a 7% return to cover debt service, the property will have negative cash flow. This happens when purchase prices are high relative to rents, or when interest rates rise after you underwrote at a lower rate.
Is cash flow taxable income? Not all of it. Depreciation (a non-cash expense) often offsets a significant portion of rental income for tax purposes, making your taxable income lower than your actual cash flow. Consult a CPA for your specific situation.
Does cash flow include principal paydown? No. Cash flow is a pure cash measure — principal reduction is an equity event that happens on paper. Total return includes cash flow plus equity paydown plus appreciation. Each should be tracked separately.
Cash flow is an analytical metric, not investment advice. Returns shown are illustrative. Always verify inputs with current market data and consult qualified professionals before making investment decisions.