Landlords, How Do You Calculate a Rental's Real Cash Flow?
Real Estate Broker · Frankfort, KY · Member since 2019 · 174 posts · 45 votes
Landlords, How Do You Calculate a Rental's Real Cash Flow?
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Dan BeaulieuPro Member
Lender · Knoxville, Tennessee (TN) · Member since 2016 · 425 posts · 670 votesLinda, I'm a lender, fwiw. I look at DSCR all day and I still tell people that number is for the bank, not for you. Two totally different tests.
Take a plain 3/2 in Knoxville at $230k that rents for $1,850. Put 25% down ($57,500) and finance $172,500 at 7.5% for 30 years. P&I lands around $1,206. Throw on roughly $175 taxes and $150 insurance (real quotes, not internet guesses) and your PITI is about $1,531.
Rent over PITI is 1.21. Most DSCR programs shrug and fund that. File closed, everyone smiles.
Then you sit down as the owner. Vacancy 8, repairs 8, capex 8, management 10. That's 34% of rent, call it $629. $1,850 minus $1,531 minus $629 leaves you short about $310 a month.
Same deal. Bank says yes. Your pocket says no. Self manage and ditch the $185 management fee and you're still roughly $125 underwater, and that $57,500 down payment is just sitting there while you chase toilets on Saturdays.
I usually flip it. Start with the cash you actually want (I aim for about $150 a door after every reserve, and 8 to 10% cash on cash). Then reverse into rent and price. On this example you'd need the seller to come down something like $75k before it gets interesting. That alone is usually enough to walk.
Cash reserves for me are six months of the full PITI in a real account per door. Around $9,200 here. Not a HELOC you might tap later. And before I buy I stress it: rent down 10%, insurance up 20% at renewal. If it still breaks even under that, I'm comfortable.
Curious what market you're looking at. Numbers change a lot by city.
16 Replies
The quick screen I'd start with is the one lenders use on rental loans, debt service coverage. Take the monthly rent and divide it by the full monthly payment, meaning principal, interest, taxes, insurance and HOA. Above 1.0 means the rent covers the payment. A lot of investors want to see 1.2 or better before they get comfortable.
That's the lender's test though, not the owner's. It leaves out vacancy, repairs, capex and management, so a property can pass at 1.1 and still lose money the month a water heater goes. For your own numbers, take a percentage of rent off the top for each of those and see what's actually left.
Two other habits that help: use the lower of the current lease or realistic market rent, and get real insurance quotes instead of estimating. Insurance is the line I see catch people off guard the most right now.
Full disclosure, I work at a private lender that does DSCR loans, so I see a lot of rental numbers before and after the appraisal comes in.
- 2dJohn RacinePro MemberRental Property Investor · Casselberry, FL · Member since 2008 · 114 posts · 65 votes
Linda, Cat's DSCR check is a good first screen. It tells you whether the lender is comfortable. Here's what I add to find out whether I'm comfortable.
Count turnover as its own line, not just as part of vacancy. Vacancy is the empty days. Turnover is the paint, cleaning, repairs, re-listing and your time between tenants. My steadier Orlando rentals turned over roughly once a year. My first two duplexes turned over a couple of times a year, and the cost of all those turns ate nearly everything they made. For vacancy itself, I underwrite 10%. I'd rather overestimate it and come out ahead than underestimate it and come up short. Then estimate how often tenants in that specific area actually move, and price out a turn on top of that.
Run it with a management fee, even if you'll self-manage. If the deal only works because your time is free, it's thinner than it looks.
Leave tax benefits out of the cash-flow test. Depreciation is a bonus, not the reason a property cash flows.
Check your fallback before you buy. Those duplexes looked like good Section 8 candidates, but I couldn't get them approved. Whatever your plan B is (a different tenant pool, mid-term, selling), confirm it's actually open to you on that property.
Are you screening something to buy and hold, or something you're thinking of refinancing?
- 2dAshish AcharyaBusiness MemberCPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
Linda, I’d separate the underwriting into three numbers: pre-tax cash flow, taxable income, and after-tax cash flow.
For the property itself, I'd start with realistic rent and subtract vacancy, management, taxes, insurance, repairs, CapEx reserves, and debt service. Then I'd look at the tax side separately, including depreciation and interest.
One important distinction is that principal paydown is a real cash expense but generally isn't a current tax deduction, while depreciation can reduce taxable income without reducing current cash flow.
So I like to see both a conservative cash-flow model and an after-tax model before deciding whether a property actually works.
I’d also want enough reserves that the property still works through a vacancy or major repair rather than only looking at the average month.
INVESTOR FRIENDLY CPA®4.9242 Reviews - Member since 2026 · 112 posts · 14 votes2d
I just assume something breaks every year, cause it does 🤣 Repairs and vacancy come out before I look at what's left, and if it only works when everything goes perfect I walk.
Randy, Bunklow
- Developer · Member since 2024 · 58 posts · 19 votes2d
Linda, the screen I'd add to what's been said is the break-even ratio: operating expenses plus debt service, divided by gross potential rent. It answers "how much can go wrong before this property is paying me nothing?"
Example numbers: rent $2,000 a month, operating expenses $700 (taxes, insurance, repairs, CapEx reserve, management), debt service $1,000. That's $1,700 / $2,000 = 85%. In plain terms, rent can come in 15% short, about 1.8 months empty in a year, before the property stops covering itself. Around 85% or lower is a common comfort line. At 95% you're one slow turnover away from feeding it.
Two things I like about it alongside DSCR and a cash-flow worksheet:
1. It's built from the same numbers, so it takes a minute once your expense lines are honest, but it gives you the margin as months of vacancy instead of dollars, which is easier to judge against how often tenants actually move in that area.
2. It works for the refinance question too. Rerun it with the new payment. If the cash-out pushes the ratio from 80% to 92%, you've traded most of your cushion for the cash, and you can decide if that's worth it.
I'd also do it on a 12-month view rather than one "typical" month, since tax and insurance increases usually land once a year at renewal or reassessment, and that's when a thin property flips negative.
- 2dKyle MccawBusiness MemberProperty Manager · Keller, TX · Member since 2011 · 1k+ posts · 1k+ votes
In Texas, the two numbers people underestimate most are property taxes and insurance. If you buy a house the seller lived in, their tax bill had a homestead exemption you won't get as a landlord, so use the full assessed value times the full rate. For single-family homes I also set aside about 8-10% of rent for repairs and another 5-8% for big items like roofs, HVAC, and water heaters, plus one month of vacancy a year. If the deal still works after all that, it's a real deal.
McCaw Property Management4.4900 Reviews - 2dDan BeaulieuPro MemberLender · Knoxville, Tennessee (TN) · Member since 2016 · 425 posts · 670 votes
Linda, I'm a lender, fwiw. I look at DSCR all day and I still tell people that number is for the bank, not for you. Two totally different tests.
Take a plain 3/2 in Knoxville at $230k that rents for $1,850. Put 25% down ($57,500) and finance $172,500 at 7.5% for 30 years. P&I lands around $1,206. Throw on roughly $175 taxes and $150 insurance (real quotes, not internet guesses) and your PITI is about $1,531.
Rent over PITI is 1.21. Most DSCR programs shrug and fund that. File closed, everyone smiles.
Then you sit down as the owner. Vacancy 8, repairs 8, capex 8, management 10. That's 34% of rent, call it $629. $1,850 minus $1,531 minus $629 leaves you short about $310 a month.
Same deal. Bank says yes. Your pocket says no. Self manage and ditch the $185 management fee and you're still roughly $125 underwater, and that $57,500 down payment is just sitting there while you chase toilets on Saturdays.
I usually flip it. Start with the cash you actually want (I aim for about $150 a door after every reserve, and 8 to 10% cash on cash). Then reverse into rent and price. On this example you'd need the seller to come down something like $75k before it gets interesting. That alone is usually enough to walk.
Cash reserves for me are six months of the full PITI in a real account per door. Around $9,200 here. Not a HELOC you might tap later. And before I buy I stress it: rent down 10%, insurance up 20% at renewal. If it still breaks even under that, I'm comfortable.
Curious what market you're looking at. Numbers change a lot by city.
- 2dAndrew KimBusiness MemberRental Property Investor · Across the US · Member since 2026 · 12 posts · 3 votes
tip: we've managed thousands of homes and help owners acquire a bunch. safe to say that the number you underwrite and the number you actually get drift apart, so I check it monthly after you own it. one of THE largest misses we see amongst owners (+80%) is that they under-estimate property taxes - depending on county, this could change immediately when the owner changes hands.
compare actual rent collected, repairs, and vacancy against your underwritten percentages per property. there are generic numbers you could use (5% repairs, 5% capex, 8% vacancy) as starting points but the truth is, you should be looking at it from a zip code level & age of home, then replace them with trailing-12-month numbers after year one. If a house keeps missing the underwrite, either the assumption was wrong or something is leaking, and both are worth knowing early.
One thing I'd add to the good worksheets above is a stress test. Once you have your base case, rerun it with rent 5% lower, vacancy at two months instead of one, insurance and taxes up 15%, and the interest rate a point higher if you're financing. If the property still breaks even, you have a real margin of safety. If it only works in the best case, that's worth knowing before you buy.
Also count turnover as its own line. Between tenants you usually pay for cleaning, paint, small repairs, listing costs and the empty weeks, and that cost shows up every few years even if it doesn't show in a monthly average.
Finally, use the same worksheet for every property so you can compare them fairly, and update it with real actuals each year.
- 2dNoah WrightBusiness MemberUSA, Nationwide · Member since 2024 · 315 posts · 119 votes
Linda, thinking about the refinance at the screening stage is the right instinct, because that's where deals that looked fine on purchase often get squeezed. If a cash-out refi is part of the plan, rerun your worksheet at the bigger loan amount with a fresh insurance quote. With the lenders I shop, the cash-out is commonly capped by how well the rent covers the new full payment, not just by LTV. So a premium that jumped at renewal can shrink what you pull out. For reserves, I like about 6 months of the full payment per property held outside the deal. Most DSCR lenders ask for some months of reserves at closing anyway, and some programs let cash-out proceeds count toward that. The worksheet tells you if it pays, the reserve tells you if you can ride out a bad year.
- Technology · Member since 2026 · 3 posts · 0 votes1d
Hello Linda,
The screening numbers tell you if a property should work. The real answer comes from tracking actual numbers after you buy.
Track every expense by category each month: repairs, insurance, property tax, utilities, and HOA. After 12 months, compare the totals to the numbers you used before buying. That’s your true cash flow.
Two line items belong in the budget every month, even when nothing breaks: a vacancy reserve and a capex reserve. Leave them out, and a quiet year looks better than it really is.
A small bonus: if the categories match the lines on Schedule E, tax time is just adding up columns.
Do you compare your actuals to the original pro forma each year?
- Investor · miami · Member since 2026 · 9 posts · 3 votes1d
Good answers already, so I'll add the two places I see the math go wrong most. First, the rent number. Use what similar homes nearby actually leased for (signed leases, same beds/baths, last 6 months), not what they're listed at. Asking rents run high, and every line below inherits that mistake. Second, I run it top to bottom every time, the same way: rent, minus vacancy (empty months, I use 8-10%), minus taxes, insurance, repairs, management, and capex (money set aside for big replacements like the roof or HVAC), minus the loan payment = real cash flow. For a reserve target I like about 6 months of total expenses per property in the bank. Then one stress test: drop rent 10% and add a $5k repair in year one. If it still doesn't go negative, it's a keeper. If it only works on the perfect month, pass.
I ended up building a free tool that runs this same worksheet from just an address. It's in my profile if you want to try it on a listing.
- Property Manager · Scottsdale, AZ · Member since 2016 · 69 posts · 8 votes1d
Rent minus mortgage isn't cash flow. Rent minus everything that actually leaves the account is. I'm not a trust account PM: renters pay owners directly and vendors bill owners directly, so every number sits in the owner's own account, reconciled with whatever tool they like.
- Realtor · Memphis, Shelby County · Member since 2026 · 207 posts · 69 votes1d
Linda, the thread already has great worksheets, so I'll add the habit rather than another formula. Run your numbers twice: once the way the lender sees them, and once the way your bank account will. The lender's version stops at PITIA; yours keeps going — vacancy, repairs, capex, management, and turnover costs between tenants. If a deal only works in the lender's version, it's not a deal. The other habit: use the same worksheet on every property and stress it before you buy. Drop the rent 10%, bump insurance 20%, assume one extra month vacant. The deals that still look okay after that are the ones worth pursuing — everything else is hoping, and hope isn't a line item.
- Member since 2026 · 44 posts · 19 votes1d
The cleanest way to see real cash flow is to start from effective rent, which is scheduled rent minus a vacancy allowance, then subtract taxes, insurance and a set reserve for repairs and big replacements instead of a guess. Many landlords size that reserve by the age of the building and the condition of the roof, HVAC and water heater, then run the loan payment last so the property's own performance shows first. If a deal only works with zero vacancy and zero repairs, it is not really cash flow.
A simple structure: start with gross rent, subtract a vacancy allowance (many use 5 to 8 percent, but check your market's real turnover time), then subtract operating costs: taxes, insurance, any utilities you cover, and management (even if you self-manage, budgeting 8 to 10 percent keeps the numbers honest if that changes). Then add two reserve lines people often skip: maintenance (a common rule of thumb is 5 to 10 percent of rent, higher for older homes) and capital expenditures. For capex, list the age and replacement cost of the roof, HVAC, water heater, and flooring, then divide each by its remaining life to get a monthly set-aside. Only then subtract the mortgage payment to get real cash flow. Finally, stress test it: rent down 5 percent, vacancy doubled, taxes and insurance up. If the deal only works in the best case, the margin is too thin. DSCR is a lender's screen worth checking, but your reserve-adjusted cash flow is the number that tells you whether the property can carry itself.
Written with AI help, edited by me.
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