How to Tell If a Rental Property Will Make Money
Will it make money and is it worth buying are two different questions, and answering them together is where bad purchases come from. The first is arithmetic you can do before you drive out there. The second is a judgement the arithmetic feeds. Here is both, with a worked example that looks good on a napkin and loses $244 a month.
What this guide covers
- 1. These are two different questions
- 2. The arithmetic: what cash flow actually is
- 3. The expenses first-time buyers leave out
- 4. The four numbers, and what each one is for
- 5. The 1% rule is a filter, not an answer
- 6. A worked example
- 7. When a property is worth buying anyway
- 8. Rehab is where the model breaks
- 9. Before you make the offer
- 10. Questions landlords ask
1. These are two different questions
"Will this property make money?" and "Is this property worth buying?" get asked together and answered together, and that is where a lot of bad purchases come from.
The first is arithmetic. Rent comes in, expenses and debt service go out, and what is left is your monthly cash flow. It is knowable before you buy, and it is knowable to within a fairly tight range if you are honest about the expense side.
The second is a judgement. A property can produce thin cash flow and still be worth buying, and it can produce good cash flow and be a terrible purchase. The arithmetic is an input to that judgement, not a substitute for it.
This page does the arithmetic first, because most people get that part wrong, and then covers the judgement.
2. The arithmetic: what cash flow actually is
Cash flow is what is left after everything, including the reserves you are not spending yet. The formula is not complicated. The discipline is in refusing to leave things out.
| Line | Note |
|---|---|
| Gross rent | What the unit actually rents for today, not the listing price and not what you hope to raise it to |
| − Vacancy | 5% to 10% of rent depending on your market. Not zero, ever. |
| − Property tax | Check what it will be after your purchase reassesses, not what the seller pays now |
| − Insurance | Landlord policy, which is not a homeowner policy, and has gone up sharply in many markets |
| − Maintenance | 5% to 15% of rent. Older building, higher number. |
| − Capital reserve | Roof, furnace, water heater, siding. These are not maintenance and they are not optional. |
| − Management | 8% to 10%, even if you self-manage. See below. |
| − Utilities you pay | Water and sewer especially, on small multifamily |
| − HOA | If applicable, and check what it can be raised to |
| − Debt service | Principal and interest. Escrow is already counted above, so do not count it twice. |
| = Cash flow | Monthly, after everything |
3. The expenses first-time buyers leave out
When a deal that penciled at $300 a month turns out to lose money, it is almost always one of these:
- Capital reserves. A roof is $12,000 and lasts twenty years, which is $50 a month whether or not you set it aside. A furnace, a water heater, a service panel and a set of appliances are the same story. Ignoring these makes the first eight years look great and year nine catastrophic.
- Reassessment. In a lot of jurisdictions the tax bill resets on sale. The seller's $1,900 becomes your $3,400. Ask the assessor what the number will be, not the listing agent.
- The turn. Every tenant change costs paint, cleaning, a listing, screening and lost weeks. On a duplex with two-year tenancies that is a recurring cost, not a one-off.
- Water and sewer on multifamily. If the building is not separately metered, you are paying for how much your tenants like long showers.
- Insurance reality. Quote the actual landlord policy for the actual building. Do not assume a figure.
- Your own time. Covered above, and worth repeating.
4. The four numbers, and what each one is for
Each of these answers a different question. Using one of them alone is how people talk themselves into bad deals.
| Number | What it is | What it tells you |
|---|---|---|
| Cash flow | Dollars left per month after everything | Whether it feeds you or you feed it |
| Cap rate | Net operating income divided by price, ignoring the loan | How the property compares to others regardless of financing |
| Cash-on-cash | Annual cash flow divided by cash actually invested | What your money earned, compared with where else it could have gone |
| DSCR | Net operating income divided by debt service | How much cushion before the property cannot pay its own mortgage |
DSCR is the one small landlords use least and should use most. At 1.0 the property exactly covers its loan and any bad month comes out of your pocket. At 1.25 there is real room. Lenders on commercial and portfolio products often want 1.20 to 1.25 for exactly this reason, and they are not being conservative for your benefit - they have watched a lot of deals fail.
5. The 1% rule is a filter, not an answer
The old shorthand says monthly rent should be at least 1% of purchase price. In much of the country that has not been achievable for years, and where it is achievable it often signals a market with problems the number does not show.
Treat it as what it is: a fast way to decide which listings deserve twenty minutes. A property that clears 1% goes on the list. A property at 0.6% almost certainly does not cash flow with a loan on it. Neither fact is a decision. The decision needs the full expense picture, and the full picture is where deals that looked fine fall apart.
6. A worked example
A duplex at $180,000, both sides renting at $875, so $1,750 a month gross. Twenty percent down at 7% over thirty years.
| Gross rent | $1,750 |
| Vacancy at 7% | −$123 |
| Property tax (after reassessment) | −$250 |
| Insurance | −$125 |
| Maintenance at 8% | −$140 |
| Capital reserve | −$150 |
| Management at 9% | −$158 |
| Water and sewer | −$90 |
| Net operating income | $714 |
| Debt service on $144,000 | −$958 |
| Cash flow | −$244 a month |
That deal loses $244 a month, and on a napkin it looked like $1,750 of rent against a $958 payment - which is where the phrase "it cash flows $800" comes from. DSCR here is 0.75, which means the property covers three quarters of its own loan and you cover the rest, forever.
It is not necessarily a no. It is a no at that price. At $150,000 the same building works. Now you know what to offer, which is more useful than knowing whether to walk.
Run the numbers before you drive out there
The free rental cash flow calculator takes purchase price, down payment, rate, term, closing costs, rent, taxes, insurance, HOA, and your maintenance, vacancy and management percentages, and returns monthly cash flow, cap rate and cash-on-cash with the full breakdown. No account, no email, no signup.
Open the free calculator7. When a property is worth buying anyway
Cash flow is the floor, not the whole building. A property with modest cash flow can still be the right purchase when one of these is genuinely true:
- The rent is below market and you can fix it. A building at $700 when comparable units get $900 is not a bad deal, it is a mispriced one - as long as you have checked the lease terms and your state's rules on increases, and you are not counting on a raise you cannot legally make for eighteen months.
- There is real forced appreciation. A cosmetic rehab that raises both rent and value is the strongest case for buying something that does not pencil today. It is also where most projects go wrong, so see the next section.
- The amortisation is doing the work. At year one a small portion of your payment is principal. Over a decade that is substantial, and it is a real return that never shows in monthly cash flow.
- The tax treatment changes the picture. Depreciation can shelter income that the cash flow number does not reflect. This is a conversation with your preparer, not a reason to assume.
And the cases where it is not worth buying, however good the number looks: you cannot get insurance at a sane price, the neighbourhood is losing population, the building has a problem you cannot price, the numbers only work with you doing all the labour, or you would have no reserve left after closing. A deal that leaves you with no cash is a deal that turns one furnace into a crisis.
8. Rehab is where the model breaks
If your plan involves renovation, two things sink more deals than bad estimates of materials.
The first is time. A rehab budgeted at two months and delivered in five is three extra months of carrying costs - mortgage, taxes, insurance, utilities - with no rent against them. That is the real cost of a delay, and it is almost never in the spreadsheet.
The second is scope. Opening a wall finds knob and tube. Pulling carpet finds subfloor. Budget a contingency, honestly, and treat it as spent.
The way to handle both is to model the deal twice - once at your plan, once at your plan plus 30% cost and plus two months - and buy only if you can live with the second version.
When one calculator stops being enough
LandlordPro's Deal Analyzer saves deals so you can compare them side by side, and models the parts a basic calculator leaves out: DSCR, rehab budgets, and what a renovation running late does to the return. If you are looking at more than one property at a time, the comparison is the point - the deal that looks best in isolation is frequently third best on a table.
The basic cash flow, cap rate and cash-on-cash math is free and always will be, at the calculator linked above. The free plan analyses three deals in the Deal Analyzer; saving unlimited deals and comparing them side by side is included from Starter up.
Start Free - No Credit Card9. Before you make the offer
- Get the real tax number from the assessor, post-sale, not from the listing
- Get an actual insurance quote on that building, not an estimate
- Verify the rents against the leases and the bank deposits, not the seller's spreadsheet
- Age every major system - roof, furnace, water heater, panel, plumbing stack - and reserve accordingly
- Check the meters. Separately metered changes the expense side substantially
- Read the existing leases, including what you inherit and cannot change
- Charge yourself management, then see if it still works
- Model the bad version - higher costs, longer timeline - and decide whether you can carry it
If it survives all eight, you are not guessing any more. You are making a decision.
10. Questions landlords ask
Work out monthly cash flow: gross rent, minus vacancy, property tax at the post-sale assessed figure, insurance, maintenance, a capital reserve for roof and furnace and water heater, management even if you self-manage, any utilities you pay, and then debt service. What is left is what the property actually produces. The failure mode is not bad arithmetic, it is leaving lines out - reserves, reassessment and management are the three that turn a deal that looked like $300 a month into one that loses money.
Cash flow tells you whether it pays for itself; it does not tell you whether to buy it. A property can be worth buying on thin cash flow when rents are genuinely below market and you can raise them, when a renovation reliably raises both rent and value, or when amortisation and depreciation change the real return. It is not worth buying, at any number, if you cannot insure it affordably, the area is losing population, the building has a problem you cannot price, or closing would leave you with no reserve - because then one furnace is a crisis.
Capital reserves are the big one. A roof at $12,000 over twenty years costs $50 a month whether you set it aside or not, and the same is true of the furnace, water heater, panel and appliances. After that: property tax reassessment on sale, the real cost of a tenant turn, water and sewer on unmetered multifamily, an actual landlord insurance quote rather than an estimate, and their own labour.
Yes, at 8% to 10% of rent. Leaving it out means you are measuring the property's return plus your unpaid labour, and those separate the day you are sick, move away or get tired of it. A deal that only works because you work for free is not an investment, it is a job you paid to acquire.
As a filter, yes. As a decision, no. It tells you in five seconds which listings are worth twenty minutes - a property at 0.6% of price in monthly rent will almost certainly not cash flow with a loan on it. But in many markets 1% has not been achievable for years, and where it is easily achievable it sometimes signals problems the ratio cannot show. Use it to sort the list, then run the full expense picture on what survives.
1.25 or better gives you real cushion. At 1.0 the property covers its mortgage exactly and every bad month comes out of your pocket. Below 1.0 you are subsidising the loan permanently. Lenders on portfolio and commercial products commonly require 1.20 to 1.25, and that requirement exists because they have watched thin-coverage deals fail, not because they are being cautious on your behalf.
Maintenance commonly runs 5% to 15% of rent, with older buildings at the top of that range, and vacancy 5% to 10% depending on your market and tenancy lengths. Both are separate from a capital reserve, which covers the systems that fail once a decade rather than the things that break once a year. Using zero for any of the three is the most common way a projection ends up wrong.
Model the deal twice. Once at your plan, and once at your plan plus about 30% on cost and two extra months on the timeline, and buy only if the second version is survivable. Delay is the cost people leave out: three extra months of mortgage, taxes, insurance and utilities with no rent against them is usually larger than the overrun on materials.
Yes. LandlordPro's rental cash flow calculator is free with no account or email required. Enter purchase price, down payment, rate, term, closing costs, expected rent, taxes, insurance, HOA and your maintenance, vacancy and management percentages, and it returns monthly cash flow, cap rate and cash-on-cash return with the full line-by-line breakdown.
Related reading: free rental cash flow calculator · tenant screening · making tax time easier
Published by LandlordPro, a property management platform for small and midsize landlords. Written by an active landlord, reviewed periodically, and not a substitute for professional tax or legal advice.