The Rental That Cash-Flows on Paper and Bleeds in Real Life
A new investor finds a $250,000 rental that rents for $2,000 a month. The mortgage, taxes, and insurance come to 1,500. They do the quick math:2,000 minus $1,500 equals $500 a month in profit, $6,000 a year. They wire the deposit. Eighteen months later, the property is losing money.
Here's what the napkin math missed. That $500 was never the real cash flow, because it ignored the costs that don't show up every month but always show up eventually.
- Vacancy: the unit won't be rented 100 percent of the time. At a typical 5 to 8 percent vacancy rate, that's $100 to $160 a month gone.
- Repairs and maintenance: budget roughly 1 percent of property value annually, about $2,500 a year, or $208 a month.
- Capital expenditures: the roof, HVAC, and water heater all die on a schedule. Reserve another $150 to $200 a month so you're not financing a $9,000 roof with a credit card.
- Property management: even if you self-manage now, budget 8 to 10 percent of rent ($160 to $200) so the deal survives the day you don't want to take the 11 p.m. plumbing call.
Add those up and the real monthly cash flow on this property is closer to negative $200 than positive $500. The deal that looked like $6,000 a year in income is actually costing the investor money every month.
The metrics that tell the truth: serious investors don't look at one number, they look at four. NOI (net operating income) is your annual income minus all operating expenses, before the mortgage. Cap rate is NOI divided by purchase price, useful for comparing properties regardless of financing. Cash flow is what's left each month after the mortgage and every reserve. Cash-on-cash return is your annual cash flow divided by the actual cash you put in, which is the number that tells you whether this beats leaving your money in an index fund.
This calculator runs all four at once and forces you to enter the expenses the napkin math conveniently forgets, so the deal that breaks even and the deal that actually pays you stop looking identical.