How Much Cash Flow is Good for a Rental Property?

Real estate is a numbers game. Cash flow is one of the most important calculations you’ll do as a real estate investor. Understanding cash flow helps determine the financial performance of your property investment and its forecasted profitability. Cash flow is the movement of capital into and out of your business. The rental income you earn from the property comes ‘into’ your business, and expenses such as your mortgage and maintenance costs go ‘out’ of your business. 

Positive cash flow is when you have more money coming in than what you spend every month. The additional money is essentially the profit you’ve earned from your real estate investment. Negative cash flow— when the rental income isn’t enough to cover the property’s outgoing expenses, indicates that a property is not currently profitable. There are proactive steps you can take to create positive cash flow, from establishing an appropriate rental cost for the market to refinancing your mortgage rate and adding amenities. 

As a real estate investor or property manager, it is vital to understand the impact of financial metrics like cash flow on your long-term investment strategy, especially when managing a rental property or multifamily portfolio. Learn what factors will impact your cash flow and how to best navigate these to mitigate risk. 

Factors Influencing Cash Flow

Cash flow is what facilitates any rental property. If you don’t have a positive cash flow, your investment won’t be sustainable long-term, and it may end up creating a deficit or negative return on your investment. 

Cash flow is important as it ensures you can pay the expenses associated with your property without dipping into your personal finances. Repairs, insurance, property taxes, HOA fees, and regular maintenance can quickly add up. If you’re consistently experiencing negative cash flow, it may be a sign to sell your property.

Most real estate investors aim for at least a 1% monthly return rate on their rental property. The higher your cash flow, the higher your ROI will be. Higher ROIs enable you to expand your portfolio by reinvesting your capital into other properties. Positive cash flow provides you with an income stream and the financial security to do so. 

Although cash flow is an easy calculation, various factors will influence the financial health of your investment. Context is crucial to determining what is “good” cash flow, including your purchase price. 

Here are five major factors that influence cash flow:

1. Property Location

Real estate is all about location, location, location. Don’t get caught up focusing solely on areas with high rental rates. You need to consider the local market, including property taxes and any legislation that may restrict your rental opportunities. Some areas are increasingly cracking down on short-term rentals through platforms like Airbnb. Similarly, areas that have rent control laws may limit your cash flow potential. Make sure you know local laws or work with an attorney or real estate agent who can keep you abreast of the income potential in each local housing market. 

2. Property Type and Condition

Your investment’s property type and condition will determine its earning potential as a rental property. Single-family properties have limited opportunities, while multifamily rental properties have multiple rental units but have a higher risk profile. Although multifamily properties have higher cash flow potential, they’re also more expensive to purchase and require a significant commitment for ongoing financial and physical maintenance.

Conversely, more affordable properties will have a lower cash flow. Most real estate investors gradually scale their investments, starting with smaller units before reinvesting into more profitable cash flow opportunities. $200 profit for a small, single-family unit may be “good” cash flow, but the same amount could be a negative cash flow for multi-family units or more expensive properties.

3. Market Rent Rates

A studio apartment in a small town in Oklahoma isn’t going to be put on the rental market at the same price as a studio in Manhattan. Understanding your local market rent rates is crucial to determining your potential cash flow and what rent you can reasonably expect to generate. 

If the local rental market is experiencing high demand, you may be able to charge a higher rate to maximize your cash flow. However, if there’s a high vacancy rate, you may need to lower your rental rate to be competitive or keep it low to maintain tenants long-term. 

4. Financing and Mortgage Costs

The financing you use to purchase your rental property will impact your cash flow most. It’s important to do your research and determine what rental rate you’re likely to secure on your property. You want to ensure your rental income covers your mortgage costs and additional expenses. 

There are different types of financing available, from a conventional bank loan to private money loans and home equity loans. You can read more about financing options in our “How Do I Become a Successful Real Estate Investor?” guide.

5. Property Management Fees and Maintenance Costs

Your mortgage cost isn’t the only outgoing cost your property will generate. Many investors will work with a property management company to oversee maintenance and day-to-day operations. These property management fees can be costly and usually apply to investors with more extensive portfolios.

Regardless of your property type, you must consider maintenance costs. Appliances break and wear and tear happen with time. Set capital aside to cover unexpected maintenance costs, such as broken boilers, and general maintenance, such as painting and repair work. 

Calculating Cash Flow

Cash flow is one of the most important calculations you’ll do as a real estate investor. Positive cash flow is the only way to create a sustainable business and to make your investment worthwhile. It’s important to consider cash flow figures in the context of the property and your long-term goals. 

Gross Rental Income vs. Net Cash Flow

Gross rental income is the total rent generated by your rental property. If you have a multi-family unit, this amount will be the total rent generated by the property. The net cash flow is the capital that remains from this income once operating expenses and your mortgage are deducted. Net cash flow shows the amount of capital your rental property is generating or losing after you pay the associated expense. 

Formula for Cash Flow Calculation

A cash flow calculation is relatively straightforward. The formula determines the difference between your rental income and the expenses associated with that property. A cash flow calculation formula is:

Total Rental Income – Total Rental Property Expenses = Cash Flow

Example Calculation:

The key to a cash flow analysis is accurately listing all your monthly operating expenses and the associated costs. Missing out on an expense can result in an incorrect cash flow calculation and may catch you out if your cash flow is low. 

Here is an example cash flow calculation:

Total rental income: $900

Total rental property expenses: $680

• Taxes $200
• Mortgage $250
• Insurance $50
• Property Management $80
• Maintenance $100

Cash flow ($900 – $680) = $220 

Calculating Cash Flow in Privy

Privy’s integrated Long-Term Rental (LTR) Calculator simplifies the process of determining an investment’s risk by providing instant insights into the cash flow potential of any rental property. The LTR Calculator uses nationwide rental data to help you accurately analyze cash flow, making it easier to identify profitable investment opportunities. 

With Privy, you can assess factors like cap rates, cash-on-cash returns, and equity calculations to determine how much equity a property owner has and what cash flow you can expect to generate. This tool streamlines the analysis process for investors, allowing them to make informed decisions without the guesswork.

What is Considered Good Cash Flow?

Determining what’s “good” cash flow is highly subjective. There are different types of benchmarks and percentages you can use, such as the 1% or 50% rule. The goal of positive cash flow is to ensure you still have capital left from your rental income after paying all the associated expenses, including your mortgage. 

Real estate investors want their positive cash flow to be relative to their investment. Many choose to use ‘cash-on-cash’ returns to determine if their cash flow is good. If you’ve invested $100,000 in a property, then a rental income of $1,000 (1% of your investment) is considered the minimum for “good” cash flow. 

Industry Benchmarks and Percentages

There are different industry benchmarks and percentages you can use to assess your cash flow. It’s a widely accepted industry standard that cash flow shouldn’t fall below 10% of the property’s purchase cost annually. If you purchase an investment property at $200,000, a “good” cash flow is $20,000 annually or $1,666 per month. The higher your cash flow, the higher ROI you can expect. 

A buy-to-let (BTL) property usually aims for an ROI of 5%, balancing risk and reward while providing a solid return. However, the factors we covered above, such as location and market conditions, will provide a wider context to your cash flow. It’s important to do your due diligence to determine a suitable ROI for your rental property.

Rule of Thumb: 1% Rule and 50% Rule

Good cash flow is when your rental property generates enough income to pay for itself and provide a solid return. There are two calculations you can use to assess your property’s cash flow. The 1% and 50% rule are two industry benchmarks you can use as a rule of thumb. 

The 1% rule determines that your monthly rent should be no less than 1% of the price you paid for the property. This calculation will tell you the minimum amount you should be charging in monthly rent. The 1% rule can help you determine if a potential property is a worthwhile investment if the local market will facilitate a comparable or higher rental rate. 

Another rule of thumb is the 50% rule. It states that a rental property’s expenses are typically 50% of the income without adding the mortgage payment. Expenses like taxes, maintenance, and insurance often cost far more than the mortgage.

You can calculate the 50% rule by using the following formula. (Total income x 0.5) – mortgage payment = cash flow. 

The 50% rule is a quick way to filter through the potential investment properties and give you a ballpark for the cash flow you can expect to generate.

Factors Affecting What’s “Good” Cash Flow

Determining what’s a ‘good’ investment is subjective. It will depend on your investment goals and risk tolerance. Most real estate investors will look at the cash-on-cash return by dividing the annual profit from the property against the capital invested in it. 

If you’re renting out a second property, such as one you’ve inherited, your investment goals may be more moderate. If you’ve purchased a large duplex with a high mortgage rate, you’ve taken a larger risk and need high cash flow to minimize potential shortfalls caused by unexpected vacancies or additional maintenance. 

While a $300 cash flow might not be “good” for an investor with a larger portfolio, it could be enough for a smaller investor seeking an additional income stream. 

Improving Cash Flow

If your property is generating negative cash flow or you want to increase your positive cash flow, there are proactive steps you can take. It’s a good idea to assess your cash flow regularly to identify opportunities for improvement.

1. Increasing Rental Income

The easiest way to improve your cash flow is to increase your rental income. Vacancy rates hurt your cash flow, especially in multi-unit properties. Maintaining tenants long-term can help minimize vacancies. 

Depending on your property type, renting rooms out individually can maximize your cash flow. However, this structure often requires more admin work. Most real estate investors will adjust the rental amount annually in line with market values. You’ll want to make this adjustment sensibly to encourage your current tenants to re-sign and reduce vacancies.

2. Reducing Expenses

Don’t forget about the other side of the equation. Look for opportunities to reduce your operating costs and expenses. An accounting software can help you stay on top of your costs and expenses. You may be able to negotiate the monthly cost of expenses like insurance or switch to a more affordable provider. 

3. Refinancing or Restructuring Debt

If you’re struggling with cash flow, choosing to refinance or restructure debt may help you secure more favorable terms with lower monthly payments. Obtaining a new loan through refinancing will replace the existing mortgage. 

This strategy allows you to adapt to changing market conditions, leveraging lower monthly repayments to boost your cash flow. You can reinvest the additional cash flow into value-add strategies to increase the property value for tenants or an eventual sale. 

4. Value-Add Strategies

Value-add strategies are when investors improve existing properties to increase the rental income and the property’s valuation. This strategy improves the cash flow and appreciation rate. 

Investors may do this to improve a property’s attractiveness and long-term potential or its condition. If you’ve bought a ‘fixer-upper’, you’ll want to look at opportunities to improve and add value to the property. Potential improvements include enhancing landscaping and curb appeal, installing new HVAC systems, and adding on-site services if you have a multi-unit property.

Understanding Positive Cash Flow and Setting Goals

Every real estate investor has their own idea of what “good” cash flow is. Assessing cash flow should always be done in the context of the investment and the property, including the investor’s long-term strategy, purchase price, and property type. 

Positive cash flow is crucial as it ensures your rental income is covering all the expenses associated with the property. Without positive cash flow, you’ll be dipping into your own finances to cover these expenses. Cash flow calculations and benchmarks like the 1% and 50% rule will help you determine if an investment is worthwhile.