How to Calculate Cash Flow on a Rental Property

0:00Are you calculating cash flow the right way? Because this is the key metric that will tell you if a property is the right deal to buy and how your investments are actually performing. But it only works if you're including all the necessary inputs when you do the math. If you're only subtracting your mortgage payment from your rental income, that is not cash flow. This is how you calculate cash flow the right way.

0:30Hey, everyone. I'm Dave Meyer. I am a data analyst. I'm the head of real estate investing here at BiggerPockets. And with me today on the show is Ashley Kerr, co-host of the BiggerPockets Real Estate Rookie Podcast. Ashley, thanks for being here.

0:45Ashley Kehr:Dave, thank you so much for having me today. I'm excited to talk about cash flow. Yeah, it's a super crucial thing. And I think some people oversimplify it, but it doesn't need to be hard. You just need to make sure that you follow the right steps. I don't know if you ever see this, Ashley, but I see these people on the internet all the time claim that they have this incredible, sort of almost unbelievable cashflow on real estate deals. And then you sort of dig into it and you realize they're clearly just leaving out some of the expenses or just not doing the math. So today what we're going to do is show the audience how to do the real math.

1:21And I'm actually going to use a real on-market deal that I have recently been analyzing. I'm going to show you all every single number you need to include in your cash flow analysis, explain why your vacancy, maintenance, and CapEx expenses should be consistent every month, whether you spend that cash or not. And then we're going to talk about how much cash flow you actually need right now and what constitutes a good deal. Because once you know that and how to calculate it correctly, then you can actually go out and pull the trigger on some great deals. Ashley, you ready?

1:53Ashley Kehr:Yeah, I think we should start off with explaining what cash flow is to get started. Okay, well, it sounds simple, but how do you define it? Yeah, so cash flow is the amount of cash or revenue each month on the property, or it could be for the year. So that's after you get your rent income and then all of the expenses that are paid. So basically, you're taking your total expenses, fixed and variable for the property, and spreading them out over time so that it's calculated monthly. I'm so glad you broke it down by fixed and variable expenses because I think that's sort of the division where people get confused.

2:34Because it's sort of easy to do the fixed expenses. You know your principal and interest, your mortgage payment is going to be the same every month. You know what your taxes, your insurance are going to be. If you have a property manager, you know how to pencil that in. But then there's this entire other expense category for real estate investors, which Ashley called accurately variable expenses because it varies every single month. For example, your repairs and maintenance. You don't know how much you're going to have to come out of pocket in any given month for repairs and maintenance. Same thing with capital expenditures.

3:07If you're not familiar with that, capital expenditures or CapEx is basically just bigger improvements that you make to a property. These are things like adding a new roof or doing an expansion, doing a renovation. Those can all be qualified as capital expenditures. Those are also variable expenses, just like turnover costs and vacancy costs as well. And so there's this whole bucket of unknown expenses that come into your underwriting when you're figuring out cash flow. And understandably, this is where a lot of people get confused and hung up. So Ashley, how do you build this unknown quantities into your underwriting?

3:44Ashley Kehr:So a big measure of how much I'm accounting for with those variable expenses is the age of the property and also the market. So when I've invested in C-class areas, even some D-class neighborhoods, the turnover and the vacancy was way more consistent. And I needed to increase the amount that I was adding in for those properties. Repairs and maintenance and capital improvements, I needed to account for more for older properties that weren't getting a full renovation. So age of the property and also the neighborhood, the market that the property is in, I think can really help you factor those things in.

4:27Yeah. If you're buying an A-class brand new construction, your expenses, your repairs, your capex are going to be pretty low, probably for five or 10 years at least. But I think what you called out is probably the most missed part of cash flow calculations, vacancy and turnover. It's pretty normal to have one month of vacancy every other year or maybe even every year, depending on the market. And this is something you absolutely need to factor in. It doesn't sound like a lot, but if you have one month of vacancy, that's 12 % of your revenue for the entire year. That is the difference between a good deal and a bad deal.

5:01Now, actually, presuming that you could come up with a number, right? You know, it's going to be 1200 bucks a year for vacancy or turnover or whatever. How do you factor that in? Because you don't know when those things are going to actually come up. So how do you put that into your deal analysis to make sure that you're covered for that?

5:18Ashley Kehr:Yeah. So like in your example, Dave, you just gave if, you know, you're thinking one month a year, every other year, you know, you could account for one month's rent. But I think if you don't know that or understand the market in your area yet is using a percentage. So I think 5 % should be the bare minimum. If you don't have any vacancy, great. That's just a bonus that you're getting more rental income back in your pocket. But I think 5 % should be the bare minimum. And then you can kind of increase it to there. So depending on the property, sometimes I'll go as high as 10 % to save per a line item.

5:54Ashley Kehr:So that's 10 % for vacancy. That's 10 % for CapEx, 10 % for repairs and maintenance. So it really depends on the property type and where it is. But I think a percentage is a great place to start. And once you look at those expenses, sometimes it can be like, wow, I thought this was going to cash flow really, really great. Just thinking, here's my rental income. Here's my mortgage payment. But once you start to add in those percentages, it really does add up and sometimes can kill the deal. But you have to be so diligent that you're not saying to yourself, oh, well, this might happen. I might have a vacancy.

6:31Ashley Kehr:So this could be cash flow. So yeah, if that doesn't happen, I could be cash flowing$500 per month. And I think that's where a lot of investors get in trouble is they're thinking of that variable expenses as maybe will happen. And that's a worst case scenario when they should be thinking this is going to happen. This is money I'm putting towards the property. I think that's just an important mindset for people to have that it's not cash flow just because one month you had positive number in your bank account. What you need to do is average it out over time. Like you have to spread those costs, the CapEx, the vacancy over every month and just say, on average, this is what, you know, if I think all these things, these variable expenses are going to amount to 10 grand in a given year, I don't know what month they're going to hit, but I have to take 10 grand, divide it by 12 months to 800 something dollars.

7:29And I'm going to put that 800 something dollars into my deal underwriting and just putting that aside and making sure I know that, Dave, that is not your money. That is the business's money. That is this properties money. So that's sort of the mindset that I think people need to take and not to just look at that best case month that you may have and count that as your cash flow because you're just going to be disappointed down the line. All right. Well, I want to actually go through this and walk step by step how to do this the correct way so everyone who's listening to this knows how to do this analysis right.

8:03But we got to take a quick break. We'll be right back. This week's bigger news is brought to you by the Fundrise Flagship Fund. Invest in private market real estate with the Fundrise flagship fund. Check out fundrise.com slash pockets to learn more. If you've ever run rentals, you know this feeling. Your maintenance guy quits, two turnovers hit at once, tenants are texting you at midnight, and suddenly you're the plumber, the leasing agent, and the bookkeeper. Total chaos. That's when I think, this is not my job. This is a job for Indeed sponsored jobs. Because hoping the right person randomly finds your job post, that isn't a strategy.

8:39With Indeed sponsor jobs, you can actually target people with the exact skills you need. Property managers, techs, bookkeepers, people who can jump in fast and fix problems. And here's the thing. People are finding quality hires on Indeed right now. In just the minute I've been talking to you, companies like yours made 27 hires on Indeed according to Indeed data worldwide. That's real momentum. Spend less time searching and more time actually interviewing candidates who check all your boxes. That means less stress, less time, but more results. When you need the right person to cut through the chaos, this is a job for Indeed-sponsored jobs.

9:15Listeners of this show will get a$75 Indeed-sponsored job credit to help get your job the premium status it deserves at Indeed.com slash podcast. Just go to Indeed.com slash podcast right now and support our show by saying you heard about Indeed on this podcast. Indeed.com slash podcast. Terms and conditions apply. This isn't your job. it's a job for Indeed Sponsored Jobs. Vacation is expensive. Your empty place doesn't have to be. If you're heading out of town and your home is sitting empty, you could list your space on Airbnb while you're away and turn those unused nights into extra income. And with Airbnb's co-host network, getting started is more straightforward than most people think.

9:57You can hire a vetted local co-host with hosting experience who could create your listing, manage reservations, handle guest communications, and even provide onsite support for guests during their stay. So while you're away spending money, your space could be working in the background, bringing in extra cash. Find a co-host at airbnb.com slash host. Most deals don't fall apart because of the numbers. They fall apart because of the financing. You find a property that cash flows. The deal makes sense. But then the lender looks at your personal income, your tax returns, your debt to income ratio, and suddenly the deal doesn't qualify.

10:35That's the disconnect. Because as investors, we're not buying based on our W-2, we're buying based on the asset. That's why Host Financial offers DSCR loans designed for real estate investors, where qualification is based primarily on the property's income, not your personal finances. So no W-2s, no tax returns, and no DTI requirements. And with loan-to-value options up to 80 or even 85 % on eligible deals, you can keep more capital available as you grow. If you're buying rentals, refinancing, or scaling your portfolio, go to hostfinancial.com. That's H-O-S-T financial.com. And see what you qualify for.

11:17If the new year means getting rentals back in order, listings are a good place to start. Avail, part of realtor.com, makes it simple to list a rental for free and get it in front of millions of renters. One listing, one click, posted across 24 top rental sites. Avail even helps generate listing titles and descriptions to save time. More visibility means fewer days sitting vacant and getting your property rented quickly. It's a fast, free way to find renters without the usual hassle. Get started at avail.co slash biggerpockets. That's A-V-A-I-L dot C-O slash biggerpockets.

11:52Welcome back to the BiggerPockets podcast. I'm here with rookie co-host Ashley Kerr talking about cash flow, how to calculate it the right way. and we sort of talked about the mindset that you need to have, the way to start thinking about this, but I actually want to go through and just run a deal analysis to show you that this doesn't need to be hard if you're following the right steps. And so I'm gonna pull this up. If you're watching on YouTube, you can see this. I'm just gonna pull up the BiggerPockets calculator, but if you're listening, I will do my best to explain everything that I'm doing.

12:21It's a real deal that I'm looking at in Western Michigan. This is a duplex. It's a 3-1 on each side. It is very old. It was built in 1890. It's listed on the market for$350 ,000. It's been on the market for like 75 days, so I think I could realistically get it for cheaper. But let's just start here and we'll see how it goes. I will pay probably$5 ,000 for closing costs, so underwriting that. And then I would do a modest rehab. If you listen to the show, you've heard me call the slow burr. This is this thing that I like to do, which is renovate a property, but I don't try and do it super quickly.

12:59I wait until the tenants move out, opportunistically renovate the property, make the units nicer and add value, drive up the rents a little bit. But I think I could probably get this thing to maybe be 380 ,000. And I would only need to spend probably, let's say 18 grand. So not adding a huge amount of equity in terms of ARV at the current price. So I'd probably want to buy it for lower, but also just want to reiterate that The reason I would spend that$18 ,000 is not only for equity. It's because it would probably bring my rents from about$1 ,600,$1 ,700 a month, probably closer to$2 ,000 a month.

13:37And to me, that's why I would do this, but I'll go into that in just a minute. Then we will be doing our financing details. This part should be easy for everyone. I would buy this property putting at least 25 % down, and I got quoted 6.8-ish. Then I actually know exactly what the rents are going to be for this one, which is really nice. It's two Section 8 tenants, been there for a long time, so I like that. Property's in good condition. Four being really old. So I should just describe now that the floors need work. They're pretty old. The kitchen is dated. The bathroom is dated. The systems are okay.

14:12The plumbing and the electrical have been updated. It's not like knob and tube. It's not galvanized pipe. And there's about 15 years left on the roof. Now, there are some additional fixed expenses that we know too. This should be pretty easy to get. So the taxes on this property are actually about$2 ,100 right now, but property taxes everywhere are going up. So I'm going to put in$2 ,400 just because I think it makes sense to just make sure. Now, I own a similar kind of duplex in the same market. So I'm going to say$1 ,300 for insurance. That's about what I pay there. Now, this is where we get to repairs and maintenance.

14:48So Ashley, help me out here. A 135-year-old house in Michigan, cold weather climate, similar to Buffalo. What do you put for repairs and maintenance here when you're first underwriting a deal?

15:01Ashley Kehr:I think I'm going to do 8%. 8%. I like it. So one thing I often think about, I'm curious how you handle this, is if I wasn't going to invest that$18 ,000 I mentioned earlier, I'd probably bump this up to like 15%. If I was just going to buy this and hold on to it and not make any improvements, I would. but I'm comfortable keeping this 8%, 10 % because my intention is to go in and probably replace the floor soon, to redo the bathroom, and probably upgrade at least part of the kitchens. Those are a lot of the big ticket items. And I'm not talking about CapEx yet. This is just repairs and maintenance.

15:40So I am essentially going to proactively, hopefully, offset a lot of repairs and maintenance because I'm going to pay for that up front. Do you do anything similar to that?

15:49Ashley Kehr:Yeah, especially if we're going in and rehabbing the property. I think one thing that's different with yours, though, is that you're waiting until the tenant moves out. So like you're running the numbers now that someone's in there, but we should increase your vacancy more because you do know that it definitely is going to be vacant during that period of time when you're going to be holding the property. Exactly. Yeah. So that's definitely something to do. I'm doing this with another duplex right now, and it's going to take three months. To do the renovation. And so three months of vacancy is a lot.

16:23It's a considerable expense on top of the labor and materials that I'm already going to be paying. So what would you put in vacancy there for a property like this? Because that would be 25 % vacancy, but that's not going to be it going forward. So how would you think about putting in the right number here?

16:40Ashley Kehr:What class area is this? I'd say it's like a B minus. I'd probably do 8 % to 10 % on this too. All right. I'm going to put it at 8 % right now as well. And for me, this stabilization period, right, this first year probably, I am not really looking that much at how it performs the first year, because I am essentially saying this vacancy of three months, that's an investment. That's basically similar to the money I'm spending on a rehab. It's just more money I'm putting to position this for long-term success. So I will put the vacancy at 8%, because I think that's a good number going forward. And maybe what I'll do is I will just put in my repair costs instead of $18 ,000, which is my estimate for materials and labor.

17:26What I'll do is add three months of vacancy costs here, which is another nine grand. So I'm going to put this at$27 ,000 in repair costs, just so that when this calculation is done, it's the stabilized performance of the property. And I don't get hung up on what happens in year one. While we're doing things at 8%, I'm going to put my management fee at 8 % because that is what I pay.

17:47Ashley Kehr:See, I usually bump it up depending on what the 8 % is. So like right now I self-manage like the deals I've partners with, I pay myself a property management fee. But I think it's really important if you're going to self-manage, you still bake into that management fee that you still put it in there in case someday you do want to transition to a manager. It doesn't kill your cashflow. But also too, like when I did have a property management company, there was a lot of additional fees that aren't included. So I always like to bump it up a little bit. Like you said, the leasing fee, they would do like, you know, if there was an after hours, there would be like a$25 fee or something, you know, like there was additional things added on to it.

18:28Okay. I like that. Then let's do 10%. All right. Then capital expenditures. This one is tough. How do you think about this one?

18:37Ashley Kehr:The same with the age of the property and what needs to be done. So like when you have your inspection, you know, one thing I always like to do is ask the inspector, okay, what needs to be replaced today? What needs to be replaced within the next two years? What needs to be replaced in the next five? What needs to be replaced in the next 10? And that's kind of going to give me more of an idea of how much I need to go into it. But I'm thinking on this as an older property, I'm probably just going to do 8 % on it too, knowing you're going to go in and put that 18 grand into it. I think that's great advice, getting that information from the inspector.

19:12The other thing I think people really need to look at, especially when you're doing small multifamily like this, is how many of each system are there? Because I've had triplexes or four units that have one boiler and that reduces your total expense because you have one thing to service and those things are enormous. They last like 30 years. Whereas if you have a bunch of newer forced air furnaces, one in each unit, that's gonna be a lot more expensive. If those things break a little bit more frequently, and you're going to have to think about that. So the same thing goes, for example, for appliances.

19:47Appliances famously don't last that long. If you have four units, make sure that you're considering the fact that every seven to 10 years, you're probably going to have to replace that dishwasher. But you have to do it times four, unlike at a single family home. So make sure you're sort of thinking through all of that. The benefit, of course, to small multifamily is that you spread the cost of the big things like a roof or siding across four different units. So there are some cost efficiencies, but just make sure you think each of these things through.

20:15Ashley Kehr:I think that's a great point as to thinking about what type of mechanics you have in the property or appliances. Like a lot of properties around here have electric baseboard heat. It is super cheap to replace one of the baseboard heaters and not a big deal at all. But like you said, like to do a whole HVAC system, a furnace, a boiler, those things like very expensive. So looking at what type of mechanics are important too. I have this little spreadsheet that I use sometimes. It just says like, what's the average lifespan of the item, the mechanic, whatever you're looking at. What do I think it's going to cost to replace that?

20:53And then you basically divide those things and you can figure out what it is annually. So like if I think the roof has 15 years on this and its replacement value or cost is going to be$20 ,000, then I know$1 ,300 roughly per year I need to set aside for this roof eventually. Or, you know, a hot water heater is going to be$4 ,000 installed or whatever, lasts for 10 years. That's$400 that you need to set aside. So you can actually just do this kind of back of the napkin. you don't need to get overly scientific with it, but just spend the time to think it through. That's it. In the BiggerPockets calculator, if you're watching this on YouTube, you could see that there are other fees like HOA fees, electricity, gas, but because this is metered separately, the tenants will pay this.

21:38I do pay garbage. It's like less than 50 bucks a month. I'm just going to round up to 50 bucks a month. That's all the input that we need to do. Hopefully you could see that this is not so difficult. You just need to think through each of these steps. We're going to take a quick break, but when we come back, I will share with you if this property is going to cashflow and by how much. Stay with us. The Cashflow Roadshow is back. Bigger Pockets is coming to Texas January 13th to 17th, 2026. Me, Henry Washington, and Garrett Brown will be hosting real estate investor meetups in Houston, in Austin, and Dallas, along with a couple other special guests.