A rental property looks profitable on the surface: rent of $1,800/month, mortgage of $1,100/month, difference of $700/month — easy money. What this calculation misses is vacancy, taxes, insurance, maintenance, management, and capital expenditures. The real number is often much lower, sometimes negative. Here is how to calculate actual cash flow.

The Full Cash Flow Formula

Monthly Cash Flow = Gross Rent – Vacancy Loss – All Operating Expenses – Mortgage Payment

Every Expense Category

Vacancy (Budget 5-8%)

Even excellent landlords face vacancy between tenants. A 5% vacancy factor on $1,800/month rent = $90/month. Skip this and you are planning to never have a vacant month — unrealistic.

Property Tax (Varies Widely)

Annual property tax as a percentage of home value ranges from 0.3% (Hawaii) to 2.5%+ (New Jersey, Illinois, Texas). On a $250,000 property in a high-tax state, this can be $400-500/month.

Insurance

Landlord insurance (dwelling policy) is required by most lenders and averages $800-1,500/year depending on location and coverage. Budget $100-125/month.

Maintenance (Budget 1% of Value/Year)

The 1% rule: budget 1% of property value annually for maintenance and repairs. On a $250,000 property, that is $2,500/year = $208/month. Older properties may need more.

Capital Expenditures (CapEx)

Roof ($8,000-15,000 every 20-25 years), HVAC ($5,000-10,000 every 15-20 years), water heater ($800-1,500 every 10-12 years), appliances. Budget $100-200/month for a typical single-family rental.

Property Management (8-10% if Used)

If you use a property manager, they typically charge 8-10% of collected rent plus one month’s rent for finding a new tenant. On $1,800/month rent, that is $144-180/month ongoing.

The Real Math

Gross rent: $1,800. After 5% vacancy: $1,710. Mortgage: $1,100. Property tax: $175. Insurance: $110. Maintenance: $200. CapEx: $150. Total: $1,735 expenses. Cash flow: $1,710 – $1,735 = -$25/month.

This property breaks even or slightly loses money monthly — yet builds equity through mortgage paydown and potential appreciation. Understanding which scenario you are in before you buy prevents the most common landlord mistake.