How to Analyze Rental Property Cash Flow (And the Numbers That Actually Matter)
Not all rental properties cash flow. Here's how to run the numbers — cap rate, cash-on-cash, NOI, and gross yield — before you buy.
Most new investors make the mistake of looking at a rental property and thinking: "rent minus mortgage = profit." That math works on a napkin — but it fails in the real world. Here's how to calculate rental property cash flow the right way.
The Four Numbers That Matter
1. Net Operating Income (NOI)
NOI = Gross Rent × (1 – Vacancy Rate) – Operating Expenses (taxes, insurance, maintenance, management). It explicitly excludes mortgage payments, which is why it's useful for comparing properties regardless of financing.
2. Cap Rate
Cap Rate = NOI ÷ Purchase Price × 100. A 6-8% cap rate is solid in most markets. Below 5% signals an overpriced asset or weak income. Use cap rate to compare properties and markets — not to make final buy/hold decisions.
3. Cash-on-Cash Return
CoC = Annual Cash Flow ÷ Total Cash Invested × 100. This is your real return — what you actually put in versus what comes out. A 7-10% CoC return is excellent. Under 4% and you're better off in index funds with less headache.
4. Gross Rent Multiplier (GRM)
GRM = Purchase Price ÷ Annual Gross Rent. A GRM under 12 is generally favorable. It's a quick screening metric — not a substitute for full underwriting.
Expenses You Must Include
- Property taxes and insurance (often underestimated)
- Maintenance and CapEx reserves (use 1-1.5% of property value annually)
- Property management (8-10% of rent even if self-managing — your time has value)
- Vacancy (assume 5-8% even in hot markets)
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The One Rule
Run the numbers on the deal as it is today — not as you hope it will be once rents rise or the tenant situation improves. Conservative underwriting makes the difference between a rental that builds wealth and one that drains it.