How to Calculate Rental Property Cash Flow

How to calculate rental property cash flow is the arithmetic of cash left after debt service. Start with rent you actually collect. Subtract the costs of keeping the property rented. Subtract the full loan payment, principal and interest. What remains is cash flow. It is the money that can sit in the account, fund a repair, or fail to show up. Investors who stop one line earlier are looking at a different result.

Illustrations here are not a rate quote and not an offer of credit. An inquiry is not an approval.

How to Calculate Rental Property Cash Flow From the Lease You Have

Use the lease in front of you, then stress it. Gross potential rent is the annual rent if the unit stays occupied at the rent you will charge. On a house rented at $2,400 a month, that is $28,800. Vacancy is the rent you do not collect. One empty month is $2,400, so effective rent is $26,400. A renewed tenant can make vacancy zero this year. A turnover can make it one month plus a week of paint. Write the number you believe, and write a worse one beside it.

The national stock is a poor substitute for that line. The Census Bureau’s Housing Vacancies and Homeownership release put the U.S. rental vacancy rate at 7.3 percent in the second quarter of 2026, not statistically different from 7.0 percent a year earlier. That figure describes the national inventory. It does not describe your door. Seven percent of $28,800 is about one month, which is why a single-family lease often feels lumpier than the national rate. Use your calendar.

Do not put a refundable security deposit in collected rent. IRS Topic 414 says cash or the fair market value of property or services you receive for the use of real estate is rental income, and a security deposit is not income when you may be required to return it. If you later keep part of it because the tenant broke the lease, the amount you keep is income in that year. Advance rent is different: Topic 414 says you generally include advance rent in income in the year you receive it. For the bank account, a deposit you owe back is restricted cash. Prepaid rent is cash in. Label them before you call either one “rent collected.”

Subtract Operating Costs Before You Touch the Payment

Operating costs are the bills that keep the rent coming. In this illustration:

Property tax: $3,600
Landlord insurance: $1,800
Repairs and turns: $1,200
Management: 8 percent of effective rent, or $2,112
Replacement reserve: $1,200

Those sum to $9,912. Effective rent of $26,400 minus $9,912 leaves $16,488 before the loan. Lenders often call that pre-debt result net operating income. How they build the income statement for a loan file is covered in how to calculate NOI for a commercial loan. This page keeps going, because cash flow is what survives the payment.

The 8 percent management line is an illustration, not a fee quote. What property managers charge is its own question. If you manage the property yourself, you can leave the fee at zero and admit you are not paying yourself, or you can insert a fee so the number is comparable to a building you will not self-manage. Pick one and say which.

A flat percent of rent is a screening habit, not this calculation. The 50 percent rule estimates operating costs as a share of rent and never sees your tax bill, your insurance, or your note. Half of $28,800 is a guess. The $9,912 above is a list you can audit. Use the list when you are deciding whether the cash will be there.

Reserves are where optimistic spreadsheets go quiet. A $1,200 reserve is $100 a month. It will not fund a roof. It will stop you from treating every quiet month as spendable profit. If you refuse to reserve, your cash-flow number is a best case that assumes nothing large breaks. Say so in the same sentence as the result.

Escrow does not erase tax and insurance. When the servicer drafts them with the payment, they are still your costs. Count them once. Counting them inside the operating statement and again inside a “PITI” payment double-subtracts the same dollars.

Cash Left After Debt Service

Debt service is the full principal-and-interest payment for the year you are underwriting. At $1,100 a month, that is $13,200. Cash left after debt service is $16,488 minus $13,200, or $3,288. That $3,288 is the cash flow. Monthly, it is about $274 if the year behaves like the average. It will not arrive in twelve equal pieces. It arrives in the months the rent arrives and the repairs do not.

Line	Annual amount
Gross potential rent	$28,800
Less vacancy	$2,400
Effective rent	$26,400
Less operating costs	$9,912
Cash before the loan	$16,488
Less full debt service	$13,200
Cash left after debt service	$3,288

Publication 527 says you can deduct mortgage interest you pay on the rental. The cash-flow subtraction is still the entire draft. Principal leaves the account the same day interest does. Principal paydown is equity building inside the loan. It is not cash you can wire to a contractor on Thursday. People mix the two and then feel surprised when the taxable result and the bank balance disagree. Topic 414 is about income and deductible expenses. Cash flow is about the account.

Coverage is a third number, and it is not cash flow. Divide the $16,488 pre-debt result by the $13,200 payment and you get 1.25. That ratio is the debt service coverage idea explained in debt service coverage ratio for a rental. A ratio above 1.00 means the pre-debt result cleared the payment. The $3,288 is how much cleared. Programs differ on the coverage they look for. A term sheet is not a verdict on whether $274 a month is enough for your reserves.

If the note is interest-only this year, use this year’s payment, then run the later payment if amortization starts. An interest-only payment on an investment loan can make year-one cash flow look healthier than the payment you will owe when principal begins. Underwrite the payment that will exist while you still hold the loan.

What the Leftover Is Worth to You

Cash flow divided by the cash you invested is cash-on-cash. The same cash flow divided by today’s equity is a return on equity. Both start from the $3,288. They use different denominators, which is why a property you bought years ago can show a strong yield on old cash and a weak yield on the equity now trapped in the building. Cap rate versus cash-on-cash separates the purchase yield from the yield on cash in. Return on equity for a rental asks what the equity is earning now.

Two adjustments keep the $3,288 honest. First, capital projects you already know about belong in the year you will pay them, not in a footnote. A $9,000 roof in year two wipes out nearly three years of this illustration’s cash flow. Second, income tax on the rental is personal. This page does not subtract it, because the rate depends on your return. If you need spendable cash after tax, compute the tax separately and subtract it at the end. Do not pretend the pre-tax leftover is the money you will keep.

The rent itself has to be a rent someone will pay. How to run rental property comps is how you defend the $2,400 before it enters the top line. A cash-flow model that starts from a wish is a wish with a payment attached.

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Frequently Asked Questions

Does rental cash flow subtract the full mortgage payment?

Yes. How to calculate rental property cash flow subtracts principal and interest, because both amounts leave the account. Principal paydown increases your equity inside the loan, and it is not cash available that month. Publication 527 allows a deduction for mortgage interest on the rental, which is a tax result, not a reason to ignore principal in the cash calculation.

Is cash left after debt service the same as net operating income?

No. Net operating income is the operating result before debt service, and cash flow is what remains after the full payment. A building can show a solid operating result and still leave thin cash when the payment is large. Loan coverage compares that operating result with the payment, while your household spends what is left.

Should I plug in the national vacancy rate?

Use the vacancy this lease will actually have. The Census Bureau reported a 7.3 percent national rental vacancy rate for the second quarter of 2026, which describes the country’s rental stock, not one house. One house is occupied, empty, or in a turnover. A single vacant month is already a large share of a one-unit year.

Do reserves belong in the cash-flow number?

Put in a reserve you will actually set aside if you want the number to describe spendable cash. Skipping the reserve makes the result look higher and leaves the next roof unfunded. The $1,200 in the illustration is a modest annual set-aside, not a claim that every property needs that exact amount.

Does a security deposit count as collected rent?

Not while you may have to return it. Topic 414 treats that kind of deposit as outside rental income. If you keep some of it because the tenant vacated early or damaged the unit, the amount you keep is income in the year you keep it. Advance rent, which you apply to a future month, is generally income when you receive it.