What Is Cash Flow?
Cash flow answers "how much do I keep?" A duplex with $2,400/month rent, $1,200 in operating expenses, and an $850 mortgage generates $350/month — $4,200/year. That's the money you can spend, reinvest, or save. NOI tells you what the property earns before financing; cash flow tells you what you actually get. In 2024–2025, strong performance runs $200+/unit monthly. $0–$200 is acceptable but tight — one vacancy or repair eats the margin. Properties hitting 8–12% cash-on-cash return typically hold up across cycles.
Cash flow is what's left in your pocket after a rental pays all its expenses — including the mortgage. NOI minus debt service. What actually hits your bank account each month or year.
At a Glance
- Formula: NOI − Debt Service (mortgage principal + interest)
- Monthly version: Rental Income − All Expenses (including mortgage)
- Strong performance: $200+/unit monthly; 8–12% cash-on-cash
- $100/door rule: quick screening tied to 1% rule — rent × 100 = max purchase price
- Track monthly for operations; report annually for lenders and taxes
Cash Flow = NOI - Debt Service (Mortgage Payment)
How It Works
The formula. Start with NOI — rental income minus operating expenses (property taxes, insurance, maintenance, management, vacancy). That's what the property earns from operations. Then subtract debt service: your monthly mortgage payment (principal + interest). What's left is cash flow. Positive = money in your pocket. Negative = you're subsidizing the property from your own funds every month.
Monthly vs. annual. Investors track both. Monthly cash flow tells you whether you can pay bills, absorb a vacancy, or cover an unexpected repair. Annual cash flow feeds cash-on-cash return — divide annual cash flow by the cash you invested (down payment + closing costs + initial repairs) to get your CoC. $4,200 annual cash flow on $35,000 invested? 12% CoC.
Reserves matter. True cash flow forecasting includes reserves. Budget 5–10% of rent for vacancy. Set aside 1–4% of property value annually for maintenance. CapEx (roof, HVAC) is separate — a $15,000 roof with 15-year life = $1,000/year ($83/month) in reserves. Don't fund reserves and a single vacancy or repair turns "positive cash flow" into a scramble. The rental strategy guide walks through building a cash flow model that survives real-world bumps.
The $100/door rule. A quick screen: monthly rent should equal at least 1% of purchase price. $100,000 property → $1,000/month rent. Reverse it: $1,200 rent × 100 = $120,000 max price. It's a discipline tool, not a final verdict. In coastal markets, the rule often doesn't apply — you won't find 1% deals in San Jose. In Memphis or Cleveland, it's a useful first filter.
Real-World Example
Cleveland 3-bedroom. Purchase: $142,000. Down payment: $35,500 (25%). Mortgage: $106,500 at 7.25% / 30-year = $727/month P&I. Property taxes: $2,840/year ($237/month). Insurance: $1,200/year ($100/month). Total PITI: $1,064/month.
Rent: $1,350/month. Vacancy (6%): $81. Effective rent: $1,269. Operating expenses (maintenance 1%, management 10%, reserves 5%): $216/month. NOI contribution: $1,269 − $216 = $1,053/month.
Monthly cash flow = $1,053 − $1,064 = −$11
Breakeven. One month of vacancy and you're −$1,350. The DSCR would be just under 1.0x — some lenders would approve with a rate premium. But the margin's razor-thin. Compare to a $95,000 property in the same market renting for $1,100: lower price, lower mortgage, similar rent. That one might cash-flow $150/month. Same market, different structure. Cash flow tells you which deal actually works.
Pros & Cons
- Measures what you actually keep — the number that hits your bank account
- Creates a safety margin — positive cash flow absorbs vacancies, repairs, and rent dips
- Feeds cash-on-cash return — the metric that shows return on your invested capital
- Predictable when modeled correctly — monthly tracking catches problems early
- Enables scaling — cash flow from one property funds the next down payment
- Ignores appreciation — a negative-cash-flow property in a hot market might still produce strong total returns
- Sensitive to financing — a 0.5% rate increase can turn positive cash flow negative
- Requires discipline — underfunding reserves or underestimating vacancy blows up the model
- Single-property volatility — one vacancy wipes out months of positive flow
- Market-dependent — $200/door in Memphis ≠ $200/door in Austin (different risk, different growth)
Watch Out
Don't bank on appreciation to bail out weak cash flow. New investors sometimes accept −$200/month expecting the market to rise. Markets cycle. Prices stall. Tenants leave. If the property doesn't cash-flow, you're writing a check every month until something changes. That's a bet, not a plan. Target positive cash flow — or at least breakeven with a clear path to positive — before you buy.
Reserves aren't optional. A property "cash-flowing" $300/month without reserves is one $2,500 HVAC repair away from −$2,200 that month. Budget 5–10% of rent for vacancy, 1–4% of value for maintenance, and CapEx reserves for roof/HVAC. What you don't set aside comes out of your pocket when it breaks.
Monthly tracking catches what annual reports miss. If you only look at year-end P&L, you might not notice that Q3 had two vacancies and a $4,000 plumbing repair. Monthly bookkeeping — record income when received, categorize expenses, reconcile the bank account — surfaces trends before they become crises. The rental strategy guide recommends both: monthly ops, annual reporting for lenders and taxes.
$100/door is a screen, not a target. A property meeting the rule isn't guaranteed to cash-flow. Financing, taxes, insurance, and management fees vary by market. Run the full numbers. Use the rule to eliminate obvious losers, not to approve winners.
Ask an Investor
The Takeaway
Cash flow is what you keep after the property pays itself — including the mortgage. It's the number that determines whether a deal works in practice, not just on paper. Model it with realistic vacancy and reserves. Track it monthly. Don't buy negative cash flow hoping appreciation will save you. Target positive flow, fund your reserves, and let the property pay for itself.