Many rental owners believe their property is cash flow positive because rent exceeds the mortgage payment. Unfortunately, that shortcut leaves out several real costs that determine whether a property is truly performing well.

Cash flow is not what looks good on paper or what a listing calculator estimates. It is what is left after all operating costs are accounted for. This post walks through how to calculate real cash flow, the mistakes owners commonly make, and how to tell whether a property is actually helping or hurting your long-term financial goals.

Why “Cash Flow” Is Often Misunderstood

A rental can feel profitable month to month while quietly losing money over the course of a year. This usually happens because owners:

• Ignore irregular expenses

• Underestimate maintenance

• Forget vacancy costs

• Exclude long-term reserves

True cash flow measures sustainability, not just short-term comfort.

Step 1: Start With Gross Scheduled Rent

This is the rent you would collect if the property were occupied 100 percent of the time at the full rent amount.

Example:

• Monthly rent: $1,800

• Annual gross scheduled rent: $21,600

This is your starting point, not your profit.

Step 2: Subtract Vacancy, Even If the Unit Is Currently Rented

Vacancy is not optional. Every rental experiences it eventually.

A conservative rule of thumb is 5 percent vacancy for stable markets. Higher turnover or softer markets may require more.

Example:

• 5 percent of $21,600 = $1,080

Adjusted rent after vacancy:

• $21,600 − $1,080 = $20,520

Ignoring vacancy is one of the most common cash flow mistakes.

Step 3: Subtract Operating Expenses (Not Including the Mortgage)

Operating expenses are the costs required to run the property.

Common operating expenses include:

• Property management fees

• Maintenance and repairs

• Landscaping

• Utilities paid by the owner

• Insurance

• Property taxes

• HOA dues

• Pest control

• Administrative costs

These are expenses that exist whether the property is paid off or not.

Example:

• Annual operating expenses: $7,200

Net operating income (NOI):

• $20,520 − $7,200 = $13,320

NOI is one of the most important numbers in real estate investing.

Step 4: Account for Maintenance and Capital Reserves

Many owners underestimate long-term costs.

You should set aside money for:

• Appliance replacement

• Flooring

• Roofing

• HVAC

• Plumbing and electrical

• Exterior paint

A common reserve range is 5 to 10 percent of rent, depending on property age and condition. It is important to consider the age of these assets and move the reserve up or down accordingly.

Example:

• 7 percent reserve on $21,600 = $1,512

Adjusted cash flow before debt:

• $13,320 − $1,512 = $11,808

If you are not reserving funds, your cash flow is overstated.

Step 5: Subtract Debt Service (Your Mortgage)

Now subtract your actual loan payment, including principal and interest.

Example:

• Annual mortgage payments: $10,200

True annual cash flow:

• $11,808 − $10,200 = $1,608

Monthly cash flow:

• $134

This is the number that tells you whether the property is truly cash flow positive.

Step 6: Stress Test the Numbers

A property that barely cash flows is vulnerable.

Ask these questions:

• What happens if rent drops by $50?

• What happens if vacancy increases by one month?

• What happens if a major repair is needed?

If small changes turn cash flow negative, the property is fragile.

Common Cash Flow Mistakes to Avoid

• Ignoring vacancy because the unit is currently occupied

• Treating repairs as rare events instead of ongoing costs

• Forgetting management fees if you self-manage now but may not later

• Counting appreciation as cash flow

• Using optimistic rent assumptions

Cash flow should be calculated conservatively, not optimistically.

Cash Flow vs Long-Term Strategy

A property can be a good investment even with low or negative cash flow if it supports a larger strategy such as:

• Long-term appreciation

• Principal paydown

• Tax benefits

• Portfolio diversification

The key is knowing the truth, not guessing.

How Often You Should Recalculate Cash Flow

Cash flow is not a one-time calculation.

Revisit it:

• Annually

• After rent increases

• After refinancing

• After major repairs

• When considering selling or exchanging

Markets change, and so do expenses.

Final Thoughts

True cash flow is what remains after all real costs are accounted for, including vacancy and long-term reserves. If you want predictable, sustainable rentals, you need honest numbers.

A property that cash flows conservatively on paper is far less stressful to own and far more resilient over time.