Why It Matters
Cash flow = NOI − Debt Service. NOI = gross income − vacancy − operating expenses. Debt service = principal + interest. A Memphis duplex with $28,800 gross, 6% vacancy, $10,400 expenses = $16,672 NOI. Debt service $14,400. Cash flow = $2,272/year ($189/month). Cash flow analysis builds this from the ground up: rent roll, vacancy rate, operating expenses, loan terms. It's the foundation of buy-and-hold underwriting—you need to know what hits your bank account.
At a Glance
- What it is: Projected cash flow = NOI − debt service
- Why it matters: Cash flow is what pays you—the number that hits your bank account
- Key inputs: Rent, vacancy rate, operating expenses, loan terms
- Target: Positive cash flow with conservative underwriting
Cash Flow = NOI - Debt Service
How It Works
Step 1: Build NOI. Start with gross potential rent—actual rent roll or market rent. Subtract vacancy loss—5–8% for stable markets. Add other income (laundry, pet fees). That's effective gross income. Subtract operating expenses: taxes, insurance, maintenance, property management, utilities, reserves. Result: NOI.
Step 2: Calculate debt service. Loan amount × rate × term. Use a mortgage calculator or amortization formula. Annual debt service = monthly payment × 12. For interest-only loans, debt service = interest only.
Step 3: Cash flow. Cash flow = NOI − Debt Service. Positive = money in your pocket. Negative = you're subsidizing the property. Monthly cash flow = annual ÷ 12.
Step 4: Stress-test. Run conservative underwriting: bump vacancy rate 2%, raise expenses 5%. Does cash flow stay positive? If not, the deal is thin.
Real-World Example
Columbus, Ohio 4-plex. Purchase $380,000. $95,000 down, 7% rate, 25-year amortization. Debt service: $24,200/year. Gross rent: $48,000 (4 units × $1,000). Vacancy rate 6%: $2,880. EGI: $45,120. Operating expenses: taxes $5,700, insurance $2,200, maintenance $3,800, management $4,800, reserves $2,400. Total: $18,900. NOI = $45,120 − $18,900 = $26,220. Cash flow = $26,220 − $24,200 = $2,020/year ($168/month). Cash-on-cash return = $2,020 ÷ ($95,000 + $7,600 closing) = 2%. Thin—but positive. Conservative underwriting: 8% vacancy, 42% expenses. NOI drops to $22,800. Cash flow = −$1,400. Deal fails stress test. You pass or renegotiate.
Pros & Cons
- Bottom-line focus—cash flow is what you live on
- Integrates with NOI and debt service—standard industry format
- Enables comparison—cash-on-cash return across deals
- Reveals sensitivity—tweak vacancy or rate to see impact
- Ignores appreciation and principal paydown
- Pro forma dependent—NOI errors flow through
- Vacancy and expense variance can make actual cash flow differ
- Single-period—doesn't capture multi-year trajectory
Watch Out
- Pro forma trap: Seller's NOI is often inflated. Recast with your own vacancy rate and operating expenses. A $5,000 NOI error = $5,000 cash flow error.
- Rate assumption: If you're modeling 6.5% and you lock 7.5%, debt service rises. Cash flow drops. Use current rate or add 0.5% buffer.
- Thin cash flow: $100/month cash flow = 8% vacancy wipes you out. Target $200+/month per unit for cushion.
- Ignoring CapEx: Cash flow doesn't include roof replacement. Set aside reserves—$200–400/unit/year for older properties.
Ask an Investor
The Takeaway
Cash flow analysis = NOI − debt service. Build NOI from rent roll, vacancy rate, and operating expenses. Subtract debt service. That's what hits your bank account. Stress-test with conservative underwriting. If cash flow stays positive and cash-on-cash return meets your hurdle, the deal works.