What Cash Flow Actually Means for a Rental Property (and Why It Is Not Just Rent Minus Mortgage)

New real estate investors often calculate rental property cash flow as simply rent minus mortgage payment, which significantly overstates actual profitability.

A more accurate calculation subtracts property taxes, insurance, an estimated maintenance reserve, an estimated vacancy allowance for periods between tenants, and property management costs if applicable, in addition to the mortgage payment itself.

Maintenance reserves are particularly often underestimated by new investors — a commonly used rule of thumb sets aside roughly one percent of the property’s value annually for ongoing maintenance and eventual major repairs, though this varies by property age and condition.

Calculating cash flow this more complete way, before purchasing, prevents the common experience of a property that looked profitable on a simplified calculation but actually breaks even or loses money once realistic costs are included.