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How rental cash flow is calculated

By Jude Wallis

Rental cash flow is effective gross income minus operating expenses minus annual debt service. On $2,400 a month of rent, 5 percent vacancy, $8,000 of operating costs, and $1,450 of monthly debt service, annual cash flow is $1,960. Cut rent to $2,000 and cash flow is a $2,600 hole.

Cap rate

7.50%

At a 6 percent cap the same income is worth $600,000.00, which is $120,000.00 above this price.

Net operating income
$36,000.00
Price
$480,000.00
Cap rate on this price
7.50%
Value at 6% cap
$600,000.00
Amount this price sits below that value
$120,000.00
$

Rent minus operating costs, before debt service and tax.

$
%

The cap you would pay. Implied value is income divided by this rate.

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Cash-on-cash return

In short

  • Start with scheduled rent, subtract vacancy, subtract operating expenses to get NOI, then subtract debt service.
  • $2,400 a month is $28,800 a year. Five percent vacancy is $1,440. EGI is $27,360. After $8,000 of opex, NOI is $19,360. After $17,400 of debt service, cash flow is $1,960.
  • The same costs with $2,000 a month of rent produce a cash flow of minus $2,600.
  • Cap rate uses NOI and price. Cash flow uses NOI after the loan. They are neighbours, not twins.

From rent to leftover cash

Rental cash flow on this sheet is an annual identity:

cash flow=EGI−opex−debt service\text{cash flow} = \text{EGI} - \text{opex} - \text{debt service}

EGI is scheduled rent minus vacancy. Scheduled rent of $2,400 a month is $28,800 a year. Five percent vacancy is $1,440. EGI is $27,360. Operating expenses of $8,000 leave NOI of $19,360. Monthly debt service of $1,450 is $17,400 a year. Cash flow is $1,960.

How cap rates work stops at NOI and price. This page keeps going through the loan. Cash flow is the leftover after those subtractions.

The same costs, a thinner rent line

Cut monthly rent to $2,000 and keep vacancy at 5 percent, opex at $8,000, and debt service at $1,450 a month. Scheduled rent is then $24,000. Vacancy is $1,200. EGI is $22,800. NOI is $14,800. Debt service is still $17,400. Cash flow is minus $2,600.

The loan did not change. The rent did. Negative cash flow means the owner is feeding the property that year, not taking cash out.

The cap rate calculator on this page is NOI over price. Put this sheet's NOI in if you want the cap-rate neighbour. How cash-on-cash return works is this cash flow divided by cash invested.

Vacancy is a line, not an afterthought

Five percent of $28,800 is $1,440. Skipping vacancy overstates EGI, NOI, and cash flow by that amount. A month empty is a vacancy realisation, not a theoretical haircut.

Operating expenses on this sheet exclude debt service on purpose. Interest and principal on the loan sit in the debt-service line. Mixing them into opex double-counts.

How PITI works is an owner-occupier housing payment. A rental's tax and insurance usually sit in opex, while the loan sits in debt service.

Scope of this sheet

The two teaching rows are $2,400 rent with $1,960 of cash flow, and $2,000 rent with a $2,600 hole, both at 5 percent vacancy, $8,000 of opex, and $1,450 of monthly debt service. They are not depreciation, not capex reserves, and not a tax return. This is educational material, not financial advice.

Worked examples

Cash flow on \$2,400 monthly rent

Monthly rent is $2,400 for 12 months. Vacancy is 5 percent. Operating expenses are $8,000. Monthly debt service is $1,450. What is annual cash flow?

  1. Scheduled rent is $28,800.
  2. Vacancy is 5 percent of $28,800, which is $1,440. EGI is $27,360.
  3. NOI is $27,360 minus $8,000, which is $19,360.
  4. Annual debt service is $17,400. Cash flow is $19,360 minus $17,400, which is $1,960.

Annual cash flow is $1,960, from NOI of $19,360 after $17,400 of debt service.

Cash flow on \$2,000 monthly rent

Monthly rent is $2,000. Vacancy, opex, and debt service stay at 5 percent, $8,000, and $1,450 a month. What is cash flow?

  1. Scheduled rent is $24,000. Vacancy is $1,200. EGI is $22,800.
  2. NOI is $14,800.
  3. Debt service is still $17,400. Cash flow is minus $2,600.

Annual cash flow is minus $2,600. The property needs $2,600 of extra cash that year.

Common questions

Is cash flow the same as profit?

No. This sheet's cash flow is rent after vacancy, operating costs, and debt service. Depreciation, capex, and income tax are not in the line.

Can cap rate be positive when cash flow is negative?

Yes. Cap rate uses NOI before the loan. Cash flow subtracts debt service. High leverage can leave NOI positive and cash flow negative.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.