Podcast Summary: How to Calculate Cash Flow on a Rental Property

BiggerPockets Real Estate Podcast
Host: Dave Meyer (A)
Guest: Ashley Care (B), Co-host of Real Estate Rookie
Date: December 12, 2025

Episode Overview

This episode is a practical, step-by-step guide on how to accurately calculate cash flow for a rental property. Host Dave Meyer and guest Ashley Care debunk common cash flow myths, detail every expense investors must include, and demonstrate a real-life analysis on a Michigan duplex. The theme underlines that disciplined, realistic cash flow underwriting is crucial to long-term real estate investment success, and that ignoring or underestimating variable costs can turn apparent "good deals" into duds.

Key Discussion Points & Insights

1. The True Definition of Cash Flow

• Cash Flow = Income minus All Expenses:

  • Many investors make the mistake of calculating cash flow as simply rent minus mortgage, but this overlooks significant recurrent expenses.
  • Quote: "If you're only subtracting your mortgage payment from your rental income, that is not cash flow." – Dave [00:02]

• Fixed vs. Variable Expenses:

  • Fixed Expenses: Mortgage (principal and interest), taxes, insurance, and property management. These are fairly predictable.
  • Variable Expenses: Repairs, maintenance, capital expenditures (CapEx), turnover costs, and vacancy. These fluctuate and must be averaged over time.

2. Why Investors Fail at Cash Flow Calculations

• Underestimating or Omitting Variables and Vacancy:

  • Investors often neglect average expenses for vacancy and large repair items.
  • "I see these people on the Internet all the time claim that they have ... unbelievable cash flow ... and then you sort of dig into it and you realize they're clearly just leaving out some of the expenses." – Dave [00:48]

• Averaging Variable Expenses:

  • Even if you’re not spending money every month on repairs, you must still budget for them.
  • "It’s not cash flow just because one month you had positive number in your bank account. What you need to do is average it out over time." – Dave [06:54]

3. Approaches to Budgeting for Unknowns

• Assessing by Age and Class of Property:

  • Older properties or those in lower-class neighborhoods require higher allowances for maintenance and vacancy.
  • "The age of the property and also the market ... can really help you factor those things in." – Ashley [03:44]

• Using Rule-of-Thumb Percentages:

  • For vacancy, CapEx, and maintenance: 5–10% of gross rents (per line item) is typical.
  • "5% should be the bare minimum ... sometimes I'll go as high as 10% to save per a line item." – Ashley [05:18]

• Being Conservative and Realistic:

  • Don’t speculate on best-case scenarios.
  • "I think that’s where a lot of investors get in trouble is they're thinking of that variable expenses as maybe will happen. ... They should be thinking this is going to happen." – Ashley [05:54]

4. Step-by-Step: Real Deal Cash Flow Analysis

[10:32] Beginning the Example: Michigan Duplex

• Deal Details:
  • Duplex, built 1890, listed for $350K
  • $5K expected closing costs; $18K renovation (to drive up rents from $1,700 to potentially $2,000/unit)
  • 25% down payment; 6.8% interest rate mortgage
• Fixed Expenses:
  • Taxes: $2,400/year
  • Insurance: $1,300/year

[13:42] Expense Breakdowns

• Repairs & Maintenance:

  • Suggests 8% for R&M due to property age and planned renovations

• Vacancy Allowance:

  • 8% to reflect real turnover over time
  • "Three months of vacancy is a lot ... On top of labor and materials that I'm already going to be paying." – Dave [14:51]

• Property Management:

  • Suggest bumping the standard 8% up to 10% to account for additional hidden fees, even if self-managing

• Capital Expenditures (CapEx):

  • 8% again due to age, but recommends consulting inspectors for more precise projections
  • Practical tip: List out all major systems and divide replacement costs by years of useful life (e.g., roof, appliances)

• Utilities and Other Fixed Expenses:

  • Garbage: $50/month (tenants pay their own utilities)
  • Don’t forget snow removal, landscaping, or common area expenses

5. Evaluating the Numbers and “What-Ifs”

[24:45] Results at Asking Price

• Monthly cash flow: $388

• Cash-on-cash return: 4%

• "Is that a good enough deal for you?" – Dave [25:16]
  "No." – Ashley [25:19]

• Both agree a B- neighborhood requires a better return to justify the extra risk and deferred appreciation.

[27:10] Negotiation and Improvement Scenario

• Running numbers at $300K purchase:
  • Cash-on-cash return jumps to 7% ($630/mo), annualized return up to 16%
  • "If I could get this at $300 grand, I would get that 7% cash on cash return. To me, that's now an attractive return." – Dave [28:39]
  • Ashley notes she would accept even slightly less as satisfactory

[29:12] Fine-Tuning and Experience-Based Adjustments

• Always add region-specific expenses (snow plowing in Michigan or Buffalo).
• "Not accounting for snow plowing ... that like killed my cash flow." – Ashley [29:41]
• After adding those, even at $300K, the deal holds at about 6.5% COC.

6. Setting Personal Standards: What’s “Good” Cash Flow?

• No universal rule—context matters (neighborhood class, appreciation potential, risk).
  • Higher returns are needed for riskier, low appreciation, or C-class areas.
• "People always ask for a rule of thumb for cash flow. I always say to me it's like, they gotta break even." – Dave [34:35]
• For A/A+ neighborhoods, Dave’s minimum is 3–4% COC; for B- areas, 6–8%; for "no growth" areas, 10%+.

7. Cash Flow Over Time & The Importance of Goals

• Cash flow tends to rise as rents rise faster than expenses.
• "One property I bought in 2017, I was cash flowing $300/mo ... now I cash flow $1,000/mo on it ... and it also has $150K in equity." – Ashley [32:52]
• Be clear about your investing why—cash flow now or long-term appreciation—and calibrate your analyses accordingly.

Notable Quotes and Memorable Moments

• The Cash Flow Mindset:
  “It’s not cash flow just because one month you had positive number in your bank account.” – Dave [06:54]

• Vacancy Can Break a Deal:
  ”If you have one month of vacancy, that's 12% of your revenue for the entire year. That is the difference between a good deal and a bad deal.” – Dave [04:27]

• Budget Snowplow Removal!
  “Not accounting for snow plowing ... that like killed my cash flow. I think we ended up cash flowing like a hundred dollars on the first deal because I didn't account for the snow plowing and how much that would be.” – Ashley [29:41]

• Deal Flexibility:
  "You can't just lower the purchase price. No, you can't. But you can offer whatever you want. That is entirely up to you." – Dave [26:48]

• Conservative Underwriting:
  "How do you underwrite super conservatively and then hopefully get better returns than even you're analyzing. Because to me the whole trick is ... I feel confident I get at least a 6.5% cash on cash return. That's good. A 15.6% annualized return. That's good." – Dave [31:08]

Key Timestamps

• 00:02 — What is cash flow?
• 03:44 — Factoring variable expenses
• 05:18 — How much to set aside for vacancy, etc.
• 10:32 — Start of real example: Michigan duplex
• 13:42 — Repairs, maintenance, and CapEx
• 24:45 — Revealing the cash flow: is it good enough?
• 27:10 — Adjusting offer price for a better deal
• 29:12 — Don’t forget region-specific, fixed expenses
• 32:52 — Cash flow growth over time
• 34:35 — Setting your own cash flow standards
• 36:07 — Final tips and summary remarks

Final Tips

• Always run worst-case, not best-case, calculations—factor in every plausible expense.
• Use realistic percentages for variable expenses, adjusting upward for older or rougher properties.
• Your personal goals and market context matter more than arbitrary formulas—be disciplined but flexible.
• Don't neglect "invisible" costs: property management (even if self-managed), snow/lawn/cleaning, and CapEx.

Closing Advice:
“Don’t forget your snowplow removal and your bags of salt and your shovels.” – Ashley [36:07]
“If you know, you know. It’s so expensive.” – Dave [36:13]

Overall, this episode lays out a comprehensive, numbers-driven approach to reliable cash flow analysis: essential listening for rookie and seasoned real estate investors alike.