"Cash flow" gets thrown around loosely. A property that looks profitable on a broker flyer can bleed money once you factor in real expenses and actual debt terms. Here's how to know for sure.
Cash flow is what's left after every bill is paid, including your mortgage:
Gross Rental Income
− Vacancy & Credit Loss (5-8%)
= Effective Gross Income (EGI)
− Operating Expenses (40-55% of EGI)
= Net Operating Income (NOI)
− Annual Debt Service (mortgage P&I)
= Cash Flow (before tax)
If this number is positive, the property cash flows. If it's negative, you're feeding the property from your pocket every month.
This property cash flows — but barely. At $106/unit/month, one unexpected repair or a month of vacancy in two units wipes out your quarterly cash flow. Whether this is acceptable depends on your appreciation thesis and value-add plan.
Many investors use $100-200 per unit per month as a minimum cash flow threshold. Below $100/unit, you have very little margin for error. The property technically cash flows, but one bad quarter (turnover, surprise repair, rate adjustment) turns you negative.
Lenders use DSCR to determine if the property can service its debt. You should use it too:
DSCR = NOI ÷ Annual Debt Service
Example: $83,566 ÷ $68,256 = 1.22x
Another way to stress-test: what occupancy do you need just to break even?
Break-Even Occupancy =
(Operating Expenses + Debt Service) ÷ Gross Potential Rent
Example: ($77,138 + $68,256) ÷ $172,800 = 84%
At 84% break-even occupancy, you need 10 of 12 units occupied just to cover costs. That leaves very little room for turnover. For comfort, target a break-even occupancy below 80% — ideally below 75%.
Not every deal needs to cash flow on day one. Negative cash flow can be acceptable when:
But you need to know the exact amount and duration of negative cash flow — and have reserves to cover it. "It'll cash flow eventually" without math is how investors get into trouble.
In today's rate environment, this is critical. Small rate changes have outsized impact on cash flow:
| Rate | Monthly P&I ($900K) | Annual Cash Flow | Per Unit/Mo |
|---|---|---|---|
| 5.5% | $5,110 | $22,246 | $154 |
| 6.5% | $5,688 | $15,310 | $106 |
| 7.5% | $6,293 | $8,050 | $56 |
| 8.5% | $6,921 | $510 | $4 |
A 2% rate increase cuts cash flow by 96% in this example. If you're buying with a variable rate or a balloon, stress-test at 2% above your current rate.
Calculate NOI (income − vacancy − expenses), then subtract debt service. Positive = cash flows. Target $100-200/unit/month for adequate margin.
1.2x or higher is healthy. Most lenders require 1.2-1.25x minimum. Below 1.0x means the property can't cover its mortgage from operations.
$100-200 per unit per month is a common minimum threshold. Below $100/unit leaves almost no buffer for vacancies or unexpected repairs.
Sometimes — for value-add, lease-up, or tax strategy purposes. But you need reserves and a clear timeline to reach positive cash flow.
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