The Cash Flow Calculator: What the Math Actually Tells You About a Rental
TLDRCash flow is not what is left after principal and interest. It is what is left after principal, interest, taxes, insurance, vacancy, maintenance, property management, and capex. At today’s interest rates, you need a great deal on the front end for the math to work.
Table of Contents
- What Cash Flow Actually Is
- The Full List of Expenses
- Why Today’s Rates Make This Hard
- Why You Still Buy When Cash Flow Is Thin
What Cash Flow Actually Is
Most new investors run the math as rent minus mortgage payment. That is not cash flow. That is optimism.
A real rental underwrite looks at rent coming in, then subtracts every real cost of owning and operating that property. Only what is left at the bottom counts.
The bank cares about rent minus principal, interest, taxes, and insurance. You should care about rent minus everything.
The Full List of Expenses
When I run a deal through a cash flow calculator, I am plugging in eight things before I look at the number at the bottom.
| Input | What It Is |
|---|---|
| Loan to value | How much of the purchase the bank is covering, usually 70 to 80 percent on a refinance |
| Interest rate | Current market rate, which has been around 6.5 percent |
| Amortization | 30-year fixed is what I use |
| Taxes | Property taxes, varies by county |
| [[insurance | Insurance]] |
| [[vacancy | Vacancy]] |
| Maintenance | Regular repair and upkeep |
| property management | Usually around 10 percent of rent collected |
| [[capex | Capex]] |
That last one is the one people forget. A roof is 10 grand and happens once every 20 years. If you are not setting money aside every month for it, the day it fails you are paying out of pocket and your cash flow year is gone.
Pro TipCapex and maintenance are different buckets. Maintenance is the faucet that drips and the toilet that runs. Capex is the roof, the HVAC, the water heater. Budget them separately or you will spend the maintenance budget on a roof and have nothing left for small stuff.
Why Today’s Rates Make This Hard
Here is a real example. A 300,000 dollar house rented for 2,200 a month.
At 80 percent loan to value and 6.5 percent interest, with normal taxes, insurance, vacancy, maintenance, property management, and capex, that deal is negative cash flow. Even dropping to 70 percent loan to value might not fix it. You either need a 50-year mortgage, which is not really a thing, or you need to get the property cheaper on the front end, or you need to self-manage.
When interest rates are this high, you really have to get great deals to make this work.
What Self-Managing Does to the Math
If you take out property management and do some of the maintenance yourself, the math shifts fast. Maybe you have lower vacancy because you are picking tenants more carefully than a management company following equal housing rules. Maybe your tenants take better care of the place because they know you personally. Maybe you DIY the small stuff instead of paying someone every time a garbage disposal jams.
In tough times, I might not hire a property manager. I might not do the maintenance myself, but I might manage it myself. You can save a lot of money by managing things yourself.
That does cost you bandwidth. But when rates are this high, the bandwidth tradeoff is sometimes what turns a dead deal into a good one.
Why You Still Buy When Cash Flow Is Thin
Run the same house through a 30-year projection and the picture changes.
Rents go up around 3 to 5 percent per year on average. Your principal and interest payment does not move at all, because it is a fixed-rate 30-year mortgage. That is the whole point of a fixed-rate long-term mortgage. No variable rates, no balloons, 30 years of the same payment.
Taxes and insurance will climb over time. But the gap between your rent and your total costs widens every year because rent is rising while your biggest expense is frozen.
Year one might be break-even cash flow. Year 30 it is pure profit, and your mortgage is zero because the tenant paid it off for you.
Key ConceptYou buy rentals for the equity, not the cash flow. Cash flow just has to hold its breath until the math catches up.
That is the real story the calculator tells. If a property underwrites to zero cash flow today at conservative numbers, it will be making money in 5 years and a lot of money in 20. Buy it if the underwriting is conservative. Never buy if it is negative, because negative is stealing from the rest of your business.
FAQ
What’s a good cash flow target for a single family rental?
At today’s rates, breaking even or slightly positive is fine if you got a great deal on the front end and the rent number is conservative. Do not chase a specific dollar amount. Chase a conservative underwrite.
What’s the difference between NOI and cash flow?
NOI is net operating income, which is rent minus operating expenses like taxes, insurance, maintenance, vacancy, property management, and capex. Cash flow is NOI minus the principal and interest payment on the mortgage. Banks and commercial deals talk in NOI. You cash-flow check yourself at the bottom.
Should I include capex in my cash flow math if the house is brand new?
Yes. The roof is new, but it is aging every year. Budget for it now so you are not writing a 10,000 dollar check out of pocket in year 15. Conservative underwriting is about assuming the reserve needs exist even when they are invisible today.
How do I know what the right vacancy rate is for my area?
5 to 8 percent is a reasonable default. If your market is extra hot and class A, you might run lower. If it is C-class with tenant turnover, run higher. When in doubt, use 8 percent. You are trying to stress-test the deal.
Just starting out. Do I really need to budget for property management if I am going to self-manage?
Budget for it anyway in your underwriting. Two reasons. One, you might decide to hire a manager later, and the deal has to work both ways. Two, your own time is worth something. If the deal only cash flows because your labor is free, it is not really cash flowing.