Calculate Cash Flow on a Rental Property: 7 Essential Formulas for Investors
For real estate investors, cash flow is king. Whether you’re a first-time landlord or scaling to dozens of units, learning how to calculate cash flow on a rental property is the foundation of smart investing. Cash flow shows whether a property generates profit after expenses, helping you separate winning deals from money traps. In 2025, with higher interest rates and rising expenses, using the right formulas is more important than ever. Here are seven essential calculations every investor should know.
1) Gross Rental Income
This is the total income your property generates before expenses. Include rent, parking fees, pet rent, laundry income, and any other revenue sources. Accurate estimates of gross rental income are the starting point for all other formulas.
Formula: Gross Rental Income = Monthly Rent × 12 + Other Annual Income
2) Operating Expenses
Operating expenses include all costs of running the property, excluding mortgage payments. Think property taxes, insurance, maintenance, repairs, management fees, and utilities you cover. Many investors use the “50% Rule,” estimating expenses at ~50% of gross income, though actual costs vary by property type.
Formula: Operating Expenses = Property Taxes + Insurance + Maintenance + Utilities + Management Fees + Other Costs
3) Net Operating Income (NOI)
Net Operating Income shows profitability before financing costs. Lenders and appraisers often use NOI to evaluate a property’s value and risk.
Formula: NOI = Gross Rental Income – Operating Expenses
Example: If a property generates $24,000/year and has $10,000 in expenses, the NOI is $14,000.
4) Debt Service (Mortgage Payments)
Debt service refers to principal and interest payments on your mortgage. Always calculate based on your actual loan terms, interest rate, and amortization schedule. Failing to include accurate debt service can make a bad deal look profitable on paper.
Formula: Debt Service = Monthly Principal + Interest × 12
5) Cash Flow (Before Taxes)
This is the most critical formula for investors. Cash flow measures money left after paying expenses and debt service. Positive cash flow means your property is profitable; negative cash flow means you’re paying out of pocket.
Formula: Cash Flow = NOI – Debt Service
Example: With $14,000 NOI and $12,000 debt service, annual cash flow is $2,000 (or ~$167/month).
6) Cash-on-Cash Return
Cash-on-cash return measures how much income you earn relative to the cash you invested. It’s critical for comparing deals, especially if you finance with a mortgage.
Formula: Cash-on-Cash Return = (Annual Cash Flow ÷ Total Cash Invested) × 100
Example: If you invest $40,000 and generate $4,000 in cash flow, your cash-on-cash return is 10%.
7) Capitalization Rate (Cap Rate)
Cap rate measures return on investment if you bought the property in cash. It’s widely used to compare properties across markets. Higher cap rates generally mean higher risk, while lower cap rates often indicate stable, desirable locations.
Formula: Cap Rate = (NOI ÷ Purchase Price) × 100
Example: A $200,000 property with $14,000 NOI has a 7% cap rate.
Example: Full Cash Flow Analysis
Imagine buying a duplex for $250,000. Rent is $1,200/unit, or $28,800/year. Expenses total $11,000. Debt service on a 30-year loan at 6.5% is $13,500/year.
- Gross Rental Income = $28,800
- Operating Expenses = $11,000
- NOI = $17,800
- Debt Service = $13,500
- Cash Flow = $4,300/year ($358/month)
- Cash-on-Cash Return (if $50,000 invested) = 8.6%
- Cap Rate = 7.1%
These formulas reveal whether the duplex is a profitable deal compared to other opportunities.
Pro Tips for Cash Flow Analysis
- Be conservative: Overestimate expenses and underestimate rent to avoid surprises.
- Account for vacancies: Factor in 5–8% of gross income for vacancies in most markets.
- Include reserves: Set aside funds for capital expenditures like roofs or HVAC systems.
- Compare multiple deals: Use the same formulas for each property to find the best fit.
FAQs About Calculating Cash Flow
Q: What’s a “good” cash flow for rentals in 2025?
A: It varies by market, but many investors aim for at least $200–$300/month per unit after expenses and debt service.
Q: Should I buy a property with negative cash flow?
A: Generally no, unless you have a clear strategy for appreciation or value-add improvements to turn it positive quickly.
Q: How often should I update cash flow calculations?
A: At least annually, or whenever rents, expenses, or interest rates change significantly.
Q: Do these formulas apply to multifamily and commercial deals?
A: Yes, though expenses and financing structures may be more complex. The core math remains the same.
Q: Is cash-on-cash return better than cap rate?
A: Both matter. Cash-on-cash shows return on invested cash, while cap rate compares properties regardless of financing.
Bottom Line
Learning how to calculate cash flow on a rental property is the foundation of real estate investing. These seven formulas — from NOI to cap rate — help you evaluate deals, avoid money traps, and maximize long-term wealth. In 2025’s competitive market, investors who master the numbers have the advantage. Use these formulas to analyze every property before you buy, and you’ll build a profitable portfolio one deal at a time.
Next step: Explore more investing strategies on our Resources page. Related reads: Best Real Estate Investment Strategy, BRRRR Method Explained, and Real Estate Tax Deductions.