How to Calculate Cash Flow on a Rental Property

What It Covers

Dave Meyer and Ashley Kerr demonstrate proper cash flow calculation for rental properties using a real Western Michigan duplex example, covering fixed expenses, variable costs, vacancy reserves, and determining acceptable return thresholds.

Key Questions Answered

• •Variable expense percentages: Allocate 5-10% of rental income each for vacancy, repairs/maintenance, and CapEx based on property age and neighborhood class. Older properties in C-class areas require higher percentages than new A-class construction properties.
• •Vacancy cost calculation: One month of vacancy per year equals 12% of annual revenue loss. Always spread this cost across all twelve months in underwriting rather than treating it as occasional expense to avoid overestimating cash flow.
• •Purchase price negotiation impact: Reducing purchase price from $350,000 to $300,000 on the example duplex increased cash-on-cash return from 4% to 7% and annualized return from 8% to 16%, demonstrating negotiation's outsized impact on returns.
• •Climate-specific expenses: Cold weather markets require dedicated line items for snowplow removal, salt, and shovels as fixed expenses. These costs significantly impact cash flow but are frequently overlooked by new investors in northern climates.