The Core Cash Flow Formulas Every Investor Needs
Rental property cash flow analysis comes down to a few essential formulas. Mastering them allows you to evaluate any deal in minutes and avoid costly mistakes. This page covers each formula, explains the variables, and shows how they connect.
Formula 1: Net Operating Income (NOI)
NOI = Gross Rental Income – Vacancy Allowance – Operating Expenses
NOI represents the property’s profitability before financing costs. It is the starting point for nearly every investment metric including cash flow, DSCR, and cap rate.
Gross Rental Income: Total annual rent at full occupancy.
Vacancy Allowance: Typically 5% to 8% of gross rent to account for turnover and vacant periods.
Operating Expenses: All costs required to maintain and operate the property (taxes, insurance, management, maintenance, reserves).
Formula 2: Cash Flow
Cash Flow = NOI – Annual Debt Service
Debt service is the total annual mortgage payment including principal and interest. Cash flow is what remains after paying all expenses and the loan. Positive cash flow means money in your pocket. Negative cash flow means you are covering the difference.
Formula 3: Cash-on-Cash Return
Cash-on-Cash Return = Annual Cash Flow / Total Cash Invested
This tells you the return on the actual dollars you put into the deal. If you invest $60,000 (down payment + closing costs) and the property produces $4,800/year in cash flow, your cash-on-cash return is 8%.
Most investors target 8% to 12% cash-on-cash return on buy-and-hold rentals.
Formula 4: DSCR
DSCR = NOI / Annual Debt Service
This formula determines whether the property qualifies for a DSCR loan. A ratio above 1.0 means the property covers the mortgage. Above 1.25 typically earns the best loan terms.
Formula 5: Cap Rate
Cap Rate = NOI / Property Value
Cap rate measures the return on the property assuming no financing. It is useful for comparing properties across markets and price points. A property with $15,000 NOI and a $250,000 value has a 6% cap rate.
Putting the Formulas Together
Here is a complete example using all five formulas:
- Purchase price: $300,000
- Down payment + closing: $65,000
- Monthly rent: $2,400 ($28,800/year)
- Vacancy (5%): $1,440
- Operating expenses: $9,600
- Annual debt service: $15,600
NOI: $28,800 – $1,440 – $9,600 = $17,760
Cash Flow: $17,760 – $15,600 = $2,160/year ($180/month)
Cash-on-Cash: $2,160 / $65,000 = 3.3%
DSCR: $17,760 / $15,600 = 1.14
Cap Rate: $17,760 / $300,000 = 5.9%
This property cash flows positively and qualifies for a DSCR loan, but the cash-on-cash return is below most investor thresholds, suggesting the price may be too high relative to rent.
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