Investors

What is a rental property and how does it cash flow?

By Steve Lockhart

The short answer

At its simplest, a rental property is a home you do not live in, occupied by a tenant who pays you rent under a lease.

Full answer

At its simplest, a rental property is a home you do not live in, occupied by a tenant who pays you rent under a lease. The rent becomes the property's income, and everything the property costs, the mortgage, property taxes, insurance, HOA dues, property management, maintenance, and vacancy, comes out of that income.

Cash flow is the leftover: rent received minus all expenses, timed over a month or a year. A property that rents for $2,000 a month but costs $1,900 a month in mortgage, taxes, insurance, management, and reserves is a property that moves money around but does not build cash. A property with the same rent and $1,700 in costs puts $300 a month in your pocket. That $300 is the cash flow, and it is the number that keeps an investor in the game through the quiet years.

The mistake new investors make is counting only the mortgage. Every rental has vacancies, every rental needs repairs, and every rental benefits from a reserve account. I tell investors to run their numbers with a vacancy allowance and a repair-and-capital-reserve built in, so the cash flow that shows up on paper is the cash flow that shows up in the bank.

A note from Steve: nothing on this page is investment, legal, or tax advice. Markets move, and every property is different. Run your own numbers on the specific deal, and talk to your CPA and attorney before you commit.

Go a little deeper

Frequently asked

Questions investors often follow up on

What counts as an expense on a rental property?

The mortgage payment, property taxes, insurance, HOA dues if any, property management, utilities you cover, repairs, maintenance, vacancy, and a reserve for future capital items like a roof or HVAC. New investors routinely forget the last three, and those are the ones that turn a paper profit into a real loss.

Is negative cash flow ever okay?

Sometimes, if the strategy is appreciation and you deliberately accept a small monthly shortfall in exchange for buying in a strong location, but that is a chosen bet on value growth, not an accident. You should never go in expecting negative cash flow as a surprise.

Do I need to self-manage to cash flow?

No, but management fees are a real cost. If you pay a manager 8 to 10 percent of collected rent, that fee has to fit inside the numbers. Self-managing saves money on paper and costs you time; professional management costs money and buys you time. Build the choice into the underwriting either way.

The Lockhart Method

Your Home | My Strategy | Proven Results

My strategy: we define cash flow the way the bank account will see it, with vacancy, repairs, and reserves counted before the property ever makes sense. If the honest cash flow works, we move forward; if it only works with perfect luck, we keep looking.

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