Cash Flow Analysis 101

Cash flow is the money left over after collecting rent and paying all expenses. It's the lifeblood of rental property investing.

Positive Cash Flow: Rent exceeds expenses. You profit every month.

Negative Cash Flow: Expenses exceed rent. You pay out of pocket monthly.

Break-Even: Rent equals expenses. No profit, but the tenant pays your mortgage.

Most investors target minimum $100-200/month positive cash flow per unit. Experienced investors often won't consider properties under $300/month.

Monthly Cash Flow = Gross Rent - Total Monthly Expenses

Gross Rent: What tenants pay monthly, including any additional income (laundry, parking, storage).

Total Monthly Expenses Include: - Mortgage payment (principal + interest) - Property taxes - Insurance - Vacancy reserve (typically 5-10%) - Maintenance reserve (typically 5-10%) - Property management (8-10% if using a PM) - HOA fees (if applicable) - Utilities (if owner-paid) - Lawn care/snow removal - Pest control - Miscellaneous reserves

Example Calculation: Gross Rent: $2,000 Mortgage: -$1,100 Taxes: -$250 Insurance: -$100 Vacancy (5%): -$100 Maintenance (8%): -$160 Property Management (10%): -$200 Monthly Cash Flow: $90

Cash-on-cash return measures the annual return on your actual cash invested.

Formula: Annual Cash Flow ÷ Total Cash Invested × 100

Total Cash Invested Includes: - Down payment - Closing costs - Immediate repairs/renovations - Reserves set aside

Example: Annual Cash Flow: $1,200 (from $100/month) Down Payment: $40,000 Closing Costs: $6,000 Initial Repairs: $4,000 Total Invested: $50,000

Cash-on-Cash Return: $1,200 ÷ $50,000 × 100 = 2.4%

Target Returns: - 8%+ is good in most markets - 10%+ is great - 12%+ is excellent (often found in value-add opportunities)

Quick screening rules to evaluate potential deals:

The 1% Rule: Monthly rent should be at least 1% of the purchase price. - $200,000 property should rent for $2,000/month minimum - Properties meeting this threshold often cash flow positively

The 2% Rule: Monthly rent equals 2% of purchase price. - $100,000 property renting for $2,000/month - Rare in expensive markets but common in the Midwest - Usually indicates strong cash flow potential

Important Caveats: - These are screening tools, not buying criteria - Always run full cash flow analysis - High-appreciation markets rarely meet these rules - Properties meeting 2% may be in challenging neighborhoods

Underestimating Vacancy: New investors often assume 100% occupancy. Budget 5-10% vacancy, even in hot markets.

Ignoring CapEx: Roofs, HVAC, water heaters need replacement. Budget $100-200/month for capital expenditures.

Forgetting Property Management: Even if self-managing, calculate PM costs. Your time has value, and circumstances change.

Optimistic Rent Estimates: Use actual comparable rents, not what you hope to get. Investra shows real market data.

Missing Hidden Expenses: HOA fees, owner-paid utilities, lawn care, pest control, licenses, and permits add up.

Not Stress-Testing: What if rates rise? What if you can't rent for 3 months? Run scenarios, not just best-case projections.