How to Calculate Cash Flow on Rental Property (Calculator Included)

Quick Overview

The correct way to calculate cash flow for a rental property involves accounting for all necessary monthly inputs, including fixed expenses like mortgage payments, taxes, and insurance, and variable expenses like vacancy (suggested 8%), repairs/maintenance (suggested 8%), capital expenditures (suggested 0%), and management fees (suggested 10%), rather than just subtracting the mortgage payment from rental income, which leads to an inaccurate, overly optimistic cash flow calculation.

Key Points: Accurate cash flow calculation requires including all fixed and variable expenses, not just the mortgage payment. The featured duplex example generates a $388/month cash flow with conservative estimates, resulting in a 7.89% 5-year annualized return. Variable expenses like Vacancy (8%), Maintenance (8%), CapEx (0%), and Management Fees (10%) significantly impact the final cash flow. The speaker strongly advises against basing projections solely on the best-case scenario month, as this leads to disappointment; a more conservative estimate is necessary. For the example property (built in 1890), the speaker budgets $1,700 annually for repairs/maintenance ($141.67/month) and $4,000 annually for snow removal/landscaping, which are often overlooked CapEx/Repair items. The goal is to create a realistic cash flow projection that accounts for these necessary, but often inconsistent, expenses. The speaker emphasizes that cash flow should be positive even when accounting for these necessary reserves, especially for older properties.

Context: The video features a discussion between BiggerPockets podcast host Dave Meyer and guest Ashley Kehr, an investor, focusing on the proper methodology for calculating cash flow on rental properties using the BiggerPockets calculator. They use a specific example of an old duplex in Western Michigan to demonstrate how including all potential expenses, especially variable ones like vacancy and maintenance, leads to a more realistic and sustainable cash flow projection, contrasting this with the common mistake of only subtracting the mortgage payment from rental income.