Analyzing an investment property's cash flow is the most critical step for any real estate investor. Cash flow is the difference between the rental income you collect and the total expenses paid out each month. A positive cash flow means the property is putting money in your pocket, while a negative cash flow means you are subsidizing the investment out of your own pocket.
Key Metrics Explained
Net Monthly Cash Flow: This is the "bottom line." It is calculated by taking your gross monthly rent and subtracting the mortgage payment, taxes, insurance, vacancy reserves, maintenance funds, and management fees.
Cash-on-Cash (CoC) Return: This measures the annual return on the actual cash you invested (down payment and closing costs). Formula: (Annual Cash Flow / Total Cash Invested) x 100.
Cap Rate (Capitalization Rate): This measures the property's profitability regardless of financing. It is calculated by taking the Net Operating Income (NOI) divided by the purchase price.
Example Calculation
Imagine you purchase a rental property for $300,000 with a 20% down payment ($60,000). Your monthly rent is $2,500.
Monthly Cash Flow: $2,500 – $2,492 = $8 per month.
In this scenario, while the property is technically "positive," the margin is very slim, highlighting the importance of accurate expense estimation before buying.
Tips for Increasing Cash Flow
If your calculation shows low or negative cash flow, consider these strategies: negotiate a lower purchase price, increase the down payment to reduce mortgage costs, look for ways to add value (like adding a bedroom) to justify higher rent, or self-manage the property to save on management fees.
function calculateROI() {
var price = parseFloat(document.getElementById("propPrice").value) || 0;
var downPct = parseFloat(document.getElementById("downPmt").value) || 0;
var rate = parseFloat(document.getElementById("intRate").value) || 0;
var term = parseFloat(document.getElementById("loanTerm").value) || 0;
var rent = parseFloat(document.getElementById("grossRent").value) || 0;
var tax = parseFloat(document.getElementById("annualTax").value) || 0;
var ins = parseFloat(document.getElementById("annualIns").value) || 0;
var maintPct = parseFloat(document.getElementById("maintPct").value) || 0;
var vacancyPct = parseFloat(document.getElementById("vacancyPct").value) || 0;
var mgmtPct = parseFloat(document.getElementById("mgmtPct").value) || 0;
// Loan Calculations
var downPaymentAmount = price * (downPct / 100);
var loanAmount = price – downPaymentAmount;
var monthlyRate = (rate / 100) / 12;
var numPayments = term * 12;
var monthlyMortgage = 0;
if (rate > 0) {
monthlyMortgage = loanAmount * (monthlyRate * Math.pow(1 + monthlyRate, numPayments)) / (Math.pow(1 + monthlyRate, numPayments) – 1);
} else {
monthlyMortgage = loanAmount / numPayments;
}
// Operating Expenses
var monthlyTax = tax / 12;
var monthlyIns = ins / 12;
var monthlyMaint = rent * (maintPct / 100);
var monthlyVacancy = rent * (vacancyPct / 100);
var monthlyMgmt = rent * (mgmtPct / 100);
var totalOperatingExpenses = monthlyTax + monthlyIns + monthlyMaint + monthlyVacancy + monthlyMgmt;
var totalMonthlyOutlay = totalOperatingExpenses + monthlyMortgage;
var netCashFlow = rent – totalMonthlyOutlay;
// Yearly Metrics
var annualCashFlow = netCashFlow * 12;
var cocReturn = (annualCashFlow / downPaymentAmount) * 100;
var noi = (rent – totalOperatingExpenses) * 12;
var capRate = (noi / price) * 100;
// Display results
document.getElementById("resultArea").style.display = "block";
document.getElementById("resMortgage").innerText = "$" + monthlyMortgage.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById("resExpenses").innerText = "$" + totalOperatingExpenses.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
var flowElement = document.getElementById("resCashFlow");
flowElement.innerText = "$" + netCashFlow.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
if (netCashFlow >= 0) {
flowElement.className = "result-value positive-flow";
} else {
flowElement.className = "result-value negative-flow";
}
document.getElementById("resCOC").innerText = cocReturn.toFixed(2) + "%";
document.getElementById("resCapRate").innerText = capRate.toFixed(2) + "%";
}