Rental Cash Flow & Cash-on-Cash Return

Start with a complete monthly budget

Use the same time period for every input. Reduce scheduled rent for vacancy and collection loss, then account for taxes, insurance, management, maintenance, owner-paid utilities and association fees. Debt service means both principal and interest. Avoid counting taxes and insurance twice if your mortgage estimate already includes them.

Set aside a separate reserve for infrequent replacements such as a roof or HVAC system. A reserve is not proof of the actual replacement cost. Obtain inspections and repair estimates for the specific property.

Understand the return you are measuring

In this example, $350 monthly cash flow becomes $4,200 per year. Dividing that amount by $50,000 of initial cash invested gives an 8.4% cash-on-cash return before income taxes. Include the down payment, closing costs and cash-funded improvements in your investment basis; use a consistent treatment of reserves.

Cash-on-cash return excludes future appreciation and principal paydown. It is not total return or a guaranteed yield. OneDEAL's modeled operating expenses include its capital-reserve input, so its displayed NOI and DSCR can be more conservative than an analysis that places reserves below NOI.

Stress the assumptions

If scheduled rent falls 5%, this example's cash flow falls from $350 to $236 with vacancy held at 5% and other inputs unchanged. A single major repair can consume several months of projected cash flow.

• Compare rents against relevant, recent local properties.
• Check insurance and property-tax estimates for your ownership situation.
• Model management costs even if you initially manage the property yourself.