How to Calculate Cash Flow on a Rental Property - BiggerPockets Real Estate Podcast Recap

Podcast: BiggerPockets Real Estate Podcast

Published: 2025-12-12

Duration: 34 min

Summary

In this episode, Dave Meyer and Ashley Kerr discuss the importance of accurately calculating cash flow on rental properties, emphasizing that simply subtracting mortgage payments from rental income is insufficient. They break down necessary expenses and provide insights on how to account for variable costs to determine true cash flow.

What Happened

Dave Meyer and Ashley Kerr kick off the episode by stressing the importance of calculating cash flow accurately when evaluating rental properties. Dave notes that many investors oversimplify cash flow calculations, leading to misleading claims about profitability. He emphasizes that true cash flow takes into account all necessary inputs, not just the mortgage payment subtracted from rental income. The duo aims to guide listeners through the correct methodology using real examples, highlighting the importance of understanding both fixed and variable expenses.

Ashley elaborates on cash flow, defining it as the net amount of cash generated from a property after subtracting all expenses, both fixed and variable. She points out that while fixed expenses like mortgage payments, taxes, and insurance are straightforward, variable expenses—such as repairs and maintenance—can be more unpredictable. This unpredictability, especially in older properties, requires investors to adjust their calculations accordingly. The conversation emphasizes the significance of factoring in vacancy and turnover rates, which can drastically affect overall cash flow, potentially turning a seemingly good deal into a bad one if not accounted for properly.

Key Insights

Key Questions Answered

What are fixed and variable expenses in real estate?

Dave Meyer and Ashley Kerr discuss the distinction between fixed and variable expenses, explaining that fixed expenses are consistent costs like mortgage payments, taxes, and insurance. In contrast, variable expenses include unpredictable costs such as repairs and maintenance, which can fluctuate based on the property's age and condition.

How do vacancy and turnover affect cash flow?

Ashley emphasizes that vacancy and turnover rates are critical components of cash flow calculations. For instance, even a single month of vacancy can account for a significant percentage of annual revenue, making it essential for investors to factor these costs into their financial analysis.

How much should I budget for repairs and maintenance?

Ashley suggests that the budget for repairs and maintenance should be proportional to the property's age and condition. She highlights that older properties often require more funds for maintenance and improvements, and investors should prepare for these variable expenses accordingly.

What percentage of rental income should I set aside for variable expenses?

According to Ashley, a good starting point for budgeting variable expenses is to allocate at least 5% of rental income for vacancy and turnover. This percentage can be adjusted based on the property's specific circumstances, such as its location and condition.

Why is averaging expenses over time important?

Dave stresses the importance of averaging variable expenses over time to ensure accurate cash flow calculations. By spreading costs like repairs and capital expenditures over the months, investors can gain a more realistic view of their property's financial performance, rather than relying on short-term cash flow spikes.