Cash flow = gross rent minus vacancy, operating expenses, and debt service. On a $300,000 rental property with 20% down at 7%, renting for $1,800/month: mortgage = $1,596, taxes + insurance = $350, vacancy + repairs + management = $360. Monthly cash flow: -$506. Many rentals lose money on paper — appreciation and tax benefits are where the wealth is.
Positive cash flow on a rental property is genuinely hard to achieve when you buy with conventional financing at today's rates. That does not mean rentals are bad investments — but it means understanding the full cost picture matters more than ever.
The Full Cash Flow Formula
- 1.Gross Scheduled Income (GSI): monthly rent × 12
- 2.Minus vacancy allowance: typically 5–10% of GSI
- 3.= Effective Gross Income (EGI)
- 4.Minus operating expenses: property tax, insurance, repairs (1% of value/yr), management (8–12%), utilities (if applicable)
- 5.= Net Operating Income (NOI)
- 6.Minus debt service (mortgage principal + interest)
- 7.= Cash Flow
Calculate Your Rental ROI
Real Example: $300,000 Rental at 7%
- •Purchase price: $300,000 | Down payment: $60,000 (20%)
- •Loan: $240,000 at 7% / 30yr = $1,597/month
- •Monthly rent: $1,900
- •Vacancy (5%): -$95
- •Property tax + insurance: -$350
- •Repairs/maintenance (1%/yr): -$250
- •Property management (10%): -$190
- •Net cash flow: $1,900 – $95 – $350 – $250 – $190 – $1,597 = -$582/month
Why Investors Still Buy Cash-Flow-Negative Properties
A $582/month negative cash flow on a $300,000 property is $6,984/year — but if the property appreciates 4%/year, that is $12,000 in equity gained annually. Plus mortgage paydown of ~$4,000/year in year 1. Total return: roughly $9,000/year on a $60,000 down payment — a 15% annual return despite negative cash flow.
The 1% rule (monthly rent should equal 1% of purchase price) is a quick filter for cash flow potential. A $300,000 property needs $3,000/month rent to pass. Most markets no longer meet this threshold — which is why cash flow investing has shifted to lower-cost markets.