The Rent Covers the Mortgage. So Why Is the Rental Losing Money?
Quick answer: Rent covering the mortgage payment doesn't mean a rental makes money. Real cash flow is rent after vacancy, minus taxes, insurance, HOA, maintenance, capital reserves, management, and utilities, minus the loan payment. In an illustrative example, $3,000 rent easily covers a $2,000 principal-and-interest payment, yet the property still runs about $240 a month negative.
"Rent is $3,000 and the mortgage is $2,000. That's $1,000 a month!"
It's not. And the gap between those two numbers is where a lot of first-time investors get hurt.
How do you calculate rental property cash flow?
Four steps:
Effective rent = monthly rent × (1 − vacancy %)
Operating expenses = taxes + insurance + HOA + maintenance + capital reserves + management + owner-paid utilities + other costs (all monthly)
Cash before debt = effective rent − operating expenses
Cash flow = cash before debt − principal and interest − other financing costs
A worked example
These figures are made up to show the math. Use your own.
Line | Monthly |
Gross rent | $3,000 |
Effective rent after 5% vacancy | $2,850 |
Property taxes ($4,800/yr) | $400 |
Insurance ($1,800/yr) | $150 |
Maintenance reserve | $150 |
Capital-expenditure reserve | $150 |
Property management | $240 |
Total operating expenses | $1,090 |
Cash before debt service | $1,760 |
Principal and interest | $2,000 |
Estimated cash flow | −$240 |
The rent covers the mortgage by $1,000. The property still loses about $240 a month, or $2,880 a year.
Is that a bad deal?
Not automatically. Some investors accept negative or thin cash flow because they're betting on appreciation, paying down the loan, or a future rent increase. That's a strategy. It should be a choice, not a surprise.
The point is to know the real number before you buy.
What is DSCR, and how is it different from cash flow?
DSCR stands for debt service coverage ratio. Many DSCR loan programs compare a property's rent to its housing payment, typically principal, interest, taxes, insurance, and HOA dues.
In the example: $3,000 rent ÷ $2,550 payment ($2,000 + $400 + $150) = about 1.18.
Notice what that ratio leaves out: vacancy, maintenance, capital reserves, and management. A property can show a DSCR above 1.0 and still have negative cash flow.
DSCR answers a financing question: does the rent support the payment? Cash flow answers an investing question: does this property put money in your pocket? You need both answers.
How rent is counted, which costs are included, and the minimum ratio all vary by program. Some programs even allow ratios below 1.0.
What stress tests should I run before buying a rental?
Using the same example:
Stress test | Monthly cash flow | Change over a year |
Base case | −$240 | |
Rent 10% lower | −$525 | −$3,420 |
Vacancy at 10% instead of 5% | −$390 | −$1,800 |
One $3,000 surprise repair | −$240 | −$3,000 |
If the deal only works when everything goes right, it doesn't really work.
What expenses do new investors forget?
Capital reserves for roofs, HVAC, and water heaters
Vacancy between tenants
Turnover costs like paint, cleaning, and leasing fees
Management, even if you plan to self-manage
Owner-paid utilities and local rental registration fees
Short-term rentals add more: seasonality, furnishing, platform fees, and local rules.
Run your own deal
The free INVESTMENT worksheet calculates cash flow, initial cash invested, a simple cash-flow yield, an illustrative rent-to-payment ratio, and three stress tests.
FAQ
How do you calculate cash flow on a rental property? Take rent after vacancy, subtract all operating expenses, then subtract the loan payment. What's left is monthly cash flow.
What is a good cash flow on a rental property? It depends on your goals, your reserves, and your market. Know the real number after all expenses, not just rent minus the mortgage.
What is the difference between DSCR and cash flow? DSCR compares rent to the housing payment for financing purposes. Cash flow subtracts all operating costs, including vacancy, maintenance, and management, to show what you actually keep.
Can a rental have a DSCR above 1 and still lose money? Yes. DSCR typically leaves out vacancy, maintenance, capital reserves, and management, which can push real cash flow negative.
How much should I budget for rental maintenance? It varies with the property's age and condition. Set aside separate monthly amounts for routine maintenance and for big replacements, and use your own estimates rather than a single rule.
The Rent Covers the Mortgage. So Why Is Your Rental Losing Money?
A rental can cover its mortgage and still lose money every month. See how to calculate real cash flow, how DSCR differs, and the three stress tests to run before you buy.
rental property cash flow
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