How to Calculate Rental Cash Flow (And the Yield You Need to Break Even)

The charges people leave out

Three provisions separate an optimistic spreadsheet from a realistic one, and none of them appears on a bank statement in a good year. Vacancy is the first: one empty month a year is 8 percent of the rent gone, and between tenants a month is common. Works are the second: a boiler, a roof or a kitchen arrives eventually, and averaging that cost across every year is the only way to see it coming.

The third is management, whether you pay an agent around 7 percent or do it yourself. Doing it yourself does not make it free; it makes the cost your time, and it means the figure you compare against another investment is inflated by unpaid labour. Keep the line in the calculation even when the money stays in your pocket.

Negative cash flow is not automatically a bad deal

Part of every loan payment repays capital, and that part is not an expense — it converts cash into equity you own. In the worked example, the first year of a 25-year loan at 3.5 percent repays a little under $4,000 of principal, so a cash flow of −$3,066 still increases net worth. What it does not do is fund itself: you must be able to pay that shortfall every month, in the months when the boiler also fails.

So read the two numbers together. Cash flow tells you whether the investment is survivable month to month; cap rate and equity build-up tell you whether it is worth surviving. A deal that is slightly negative in a low-rate, high-price city can be perfectly rational, and one that is positive in a market with no tenants is not.

What moves the break-even

The table shows the interest rate doing most of the work: the required gross yield climbs from 6.2 percent at a 2 percent rate to 8.1 percent at 5 percent, on the same term and the same deposit. Term matters almost as much — shortening 25 years to 20 raises the requirement from 7.1 to 8.0 percent, because the same capital is repaid faster.

The lever you control most directly is the deposit. Every point of loan-to-value you remove takes a slice out of the annual payment, so a larger deposit turns a negative cash flow positive without changing anything about the property. That is a real trade-off, not a free win: the money used is money not invested elsewhere, and the return it earns inside the deal is only the loan rate you avoided paying.

Frequently asked questions

Should tax be included in the cash flow?

Compute the figure before tax first, because that is the number you can compare between properties and countries. Then apply your own situation on top, since the tax on rental income depends on your bracket, your regime and what you can deduct — including, in many countries, the interest portion of the loan.

Is gross yield useless then?

Not useless, just insufficient. Gross yield is a fast filter for sorting listings, and the table above uses it precisely because it is the number every advert gives. It becomes misleading the moment you compare two properties with different service charges, different tax or different vacancy risk, which is most pairs.

How much cash buffer should a rental have?

Enough to cover several months of loan payments and charges with no rent at all, plus the largest single repair the building can plausibly need. Rental investing fails on liquidity far more often than on yield: the deal that collapses is usually the one that was fine on paper and had nothing set aside for a three-month void and a new boiler in the same year.