Cash Flow

What it is

Cash flow is the oil in your engine. Without oil, your engine locks up and goes out of commission. Cash flow is your business’s oil.

But here’s what cash flow actually is — it’s not rent minus mortgage. That’s the number people quote at meetups and on social media. Real cash flow is what’s left after every dollar of real operating expense comes out: mortgage, property taxes, insurance, vacancy reserve, maintenance reserve, capex reserve, and property management fee. What remains is the cash you keep.

I manage over 600 doors. What I’ve found is the 31 percent rule: 7% vacancy, 8% maintenance, 8% capex, 8% property management. That’s 31% of gross rent gone before the mortgage ever gets paid. On a $200K property renting at $1,800/month, real cash flow after the 31% haircut and debt service is about $42 per month. Not a typo. That’s what the math looks like when you budget honestly.

Why it matters

Cash flow is one of the four wealth engines on a rental, but it’s not the only one. Rentals run four engines at once: market appreciation and forced appreciation, cash flow, tax advantages (depreciation, 1031 exchange, write-offs), and equity paydown from tenants paying your mortgage. Combined, a well-bought rental returns roughly 33% per year on the down payment. Cash flow alone is one engine of four.

That’s why I tell people not to reject a deal on cash flow alone. A house cash-flowing $300 a month sounds better than one at $50, until you look at appreciation, tax shelter, and equity paydown and realize the $50 property might be the bigger winner on a five-year view.

The thing flippers get wrong is fixating on cash flow as the scoreboard. It’s not. It’s a survival metric. If it’s negative, you’re subsidizing your tenant. If it’s thin but positive, you’re in the game. If it’s strong, you have staying power across vacancies, bad tenants, and repairs.

How it shows up

The biggest trap is forgetting to reserve. Flippers buy a rental, see $400/month “cash flow,” pocket it, then spend $6,000 on a water heater, HVAC replacement, and a turnover in the same year and wonder where the money went. The reserves weren’t line items they chose to skip — they were line items they never set up.

Second trap: the red zone of growth. Between 3 and 8 doors, a single vacancy can wipe out the entire portfolio’s monthly net. You don’t have enough aggregate income yet to absorb a hit. You push through by adding doors fast and holding reserves tight.

Related

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