Rental Property Cash Flow Analysis: How to Evaluate Investment Properties

Why Cash Flow Analysis Matters

Cash flow is the lifeblood of rental property investing. A property that looks good on paper can drain your bank account without proper analysis.

Key Rental Property Metrics

1. Net Operating Income (NOI)

NOI = Gross Rental Income - Operating Expenses

Operating Expenses Include:

• Property taxes
• Insurance
• Property management (8-10%)
• Maintenance/repairs (5-10% of rent)
• Vacancy allowance (5-8%)
• Utilities (if landlord-paid)
• HOA fees

Example:

• Gross Rent: $2,400/month = $28,800/year
• Operating Expenses: $10,800/year
• NOI: $18,000/year

2. Cap Rate

Cap Rate = NOI ÷ Property Value

Example:

• NOI: $18,000
• Property Value: $300,000
• Cap Rate: 6%

3. Cash-on-Cash Return

CoC Return = Annual Cash Flow ÷ Total Cash Invested

Example:

• Annual Cash Flow: $6,000
• Cash Invested: $75,000 (down payment + closing)
• Cash-on-Cash: 8%

4. DSCR (Debt Service Coverage Ratio)

DSCR = NOI ÷ Annual Debt Service

Example:

• NOI: $18,000
• Annual Mortgage Payment: $14,400
• DSCR: 1.25

The 1% Rule (Quick Screening)

Monthly rent should be at least 1% of purchase price.

• $200,000 property should rent for $2,000+/month
• Use for quick screening, not final analysis

Common Cash Flow Killers

❌ Underestimating vacancy - Plan for 5-8% ❌ Ignoring maintenance - Budget 5-10% of rent ❌ Forgetting CapEx - Roof, HVAC, water heater replacements ❌ Optimistic rent estimates - Use actual comps ❌ Ignoring property management - Even if self-managing, account for your time

Building a Cash Flow Spreadsheet

Every analysis should include:

• Purchase price and closing costs
• Down payment and financing terms
• Monthly rental income (realistic)
• All operating expenses
• Debt service (mortgage payment)
• Net monthly and annual cash flow

Contact us for a free rental property analysis template.