Rental Property Cash Flow: Formula & Example (2026)
The purchase price says little about whether a rental property carries itself. What matters is the cash flow: what is left each month after interest, principal repayment and operating costs – or how much you have to put in? This guide shows the formula, a fully worked example and the mistakes investors make most often.
What does cash flow mean for a property?
Cash flow is the difference between the actual money coming in (rental income) and the actual money going out (interest, principal repayment, operating costs) over a period – usually per month. It is deliberately different from yield: yield is a relative figure (e.g. rental yield as a percentage of the purchase price), whereas cash flow is a concrete euro amount that actually reaches or leaves your account. A property can look good on yield and still produce a negative cash flow – for example with high leverage and a short repayment period.
The formula: pre-tax cash flow
The basic formula for monthly pre-tax cash flow is:
Apportionable service charges drop out of the calculation, since they generally net out – provided the service charge statement goes out within the deadline; once the twelve-month period has passed, a pass-through item turns into a real loss. What matters are the costs that actually stick with you as the owner – such as management fees, maintenance reserves or vacancy risk. Which items those are in detail, and why no tenancy clause brings them back, is set out in our article on non-recoverable service charges.
| Item | Effect on cash flow |
|---|---|
| Net cold rent | + (inflow) |
| Non-apportionable management costs | − (outflow) |
| Interest portion of the annuity | − (outflow) |
| Principal portion of the annuity | − (outflow, but builds equity) |
Principal repayment is where many calculations tip over: it lowers cash flow but at the same time builds equity, because the outstanding loan balance falls. A negative cash flow with high repayment is therefore not automatically a bad investment – it can be deliberate wealth-building, as long as you can carry the monthly shortfall.
Worked example with numbers
Suppose you buy an apartment for €240,000 (of which €210,000 is financed, 3.8% interest, 2% initial repayment) and let it for €850 net cold rent per month:
| Item | Amount per month |
|---|---|
| Net cold rent | €850 |
| Non-apportionable management (approx. €20/m² p.a., pro rata) | −€90 |
| Interest (3.8% of €210,000 ÷ 12) | −€665 |
| Principal repayment (2% of €210,000 ÷ 12) | −€350 |
| Pre-tax cash flow | −€255 |
In this example the pre-tax cash flow is negative – you pay in every month. Whether that carries itself depends on the tax effect and on your other liquidity. You can find the relational deal-analysis engine that automates this calculation, including a traffic-light rating, at renodiary.de.
After-tax cash flow – the often overlooked difference
For the actual liquidity effect, the after-tax cash flow is what counts. Here it becomes important to separate deductible expenses (§ 21 EStG) correctly from the pure cash movement:
- Deductible expenses = interest + depreciation (AfA) + non-apportionable operating costs – not the principal repayment, because for tax purposes repayment is a reshuffling of assets, not an expense.
- Surplus = net cold rent − deductible expenses (can be negative in the first years with high depreciation and high interest).
- Tax effect = surplus × your personal marginal tax rate. With a negative surplus this acts as a refund and increases after-tax cash flow.
Exactly this mechanism – interest and depreciation reduce the taxable result, but only the interest portion actually flows out as a payment – explains why after-tax cash flow often looks considerably better than pre-tax cash flow. How the individual items end up correctly in the tax return is explained in our guide to the Anlage V for landlords.
When is cash flow "good"?
There is no universal threshold – it depends on your equity ratio, repayment rate and your personal risk capacity. As a rough orientation for a first assessment, three bands have become established in practice:
- Clearly negative (e.g. below −€50 per month): examine the top-up need carefully – does the property only carry itself through appreciation? Whether the asking price matches the income at all is settled by the income approach.
- Balanced (roughly between −€50 and +€50): a solid basis that should carry itself under moderate rent-growth assumptions.
- Clearly positive (above +€50 per month): a comfortable buffer for maintenance, vacancy or interest-rate changes at refinancing.
These bands are a rule of thumb for an initial assessment, not a substitute for a full property calculation with maintenance reserve, vacancy rate and realistic refinancing. If you build rent growth into your assumptions, check first how much of it is actually enforceable in an ongoing tenancy: the capping limit, the local reference rent and the waiting period set the frame – worked through in calculating a rent increase: the cap and the deadlines.
Calculate pre-tax and after-tax cash flow automatically
The deal analysis in RenoDiary works through net cold rent, operating costs, interest, repayment, depreciation and § 7b special depreciation per property – including a traffic-light rating of whether a deal carries itself before or after tax. The calculator works without an account.
Run the numbers for free – no sign-upThe most common cash-flow mistakes
- Forgetting the principal repayment. Calculating with only the interest portion systematically overstates cash flow.
- Not budgeting a maintenance reserve. Even though it only takes effect for tax when actually spent, it belongs in a robust liquidity plan. What amount per square metre is appropriate is shown in maintenance reserve: how much per m².
- Overlooking the ground rent. On a leasehold plot it keeps running for the whole term — long after the mortgage is repaid. What that adds up to over 30 years is worked through in buying a leasehold (Erbbaurecht) in Germany.
- Ignoring vacancy. Assuming 100% occupancy over the entire holding period is unrealistic.
- Confusing cash flow and yield. A high rental yield says nothing about monthly liquidity if the financing is calculated tightly.
- Ignoring or overstating the tax effect. Both lead to misjudgements – the correct route runs via deductible expenses and your personal marginal tax rate, not via blanket assumptions.
- Counting a tax-free income stream only half. Where income is tax-free, the deduction for the related costs falls away as a mirror image – booking only one of the two effects makes you look richer or poorer than you are. How that plays out for a solar array on the roof is covered in solar panels on rental property.
What the courts have decided
A persistently negative cash flow is not in itself suspicious for tax purposes — it is the normal case in the first years of a debt-financed letting. Where the line runs at which the tax office demands a total-surplus forecast is not in the statute but in the case law of the Federal Fiscal Court (Bundesfinanzhof, BFH).
BFH, judgment of 20 June 2023 – IX R 17/21 (officially reported)
Where letting is arranged on a long-term basis, the intention to generate income is presumed as a matter of type — years of expense surpluses do not change that. The IX. Senate confirms the exception at the same time: for a property "mit einer Wohnfläche von mehr als 250 qm", with a living area above 250 square metres, there is an exception to that presumption "die Anlass zu deren Überprüfung mittels einer Totalüberschussprognose gibt" — giving cause to review it by means of a total-surplus forecast. The Senate adheres to these principles even after § 21 (2) sentence 2 EStG was inserted by the 2011 tax simplification act. For your calculation: with large single-family houses, the forecast over the whole holding period belongs in the file, not just the annual figures.
BFH, judgment of 31 January 2017 – IX R 17/16 (officially reported)
Vacancy is a number in the cash flow but a question of intention for tax. Where an owner is permanently unable, "aus tatsächlichen oder rechtlichen Gründen" — for factual or legal reasons — to put the flat into a lettable condition and offer it for letting, the tax court may, on an overall assessment, find that the intention to generate income is absent; the costs are then not deductible. Anyone carrying a vacant unit in their calculation should therefore document their letting efforts.
Frequently asked questions
Is a negative cash flow always a bad investment?
Not necessarily. With high repayment, equity builds up in parallel, and after-tax cash flow can turn out considerably better than pre-tax cash flow thanks to deductible expenses. What matters is whether you can carry the monthly shortfall on a lasting basis.
How does a higher repayment rate affect cash flow?
A higher initial repayment lowers pre-tax cash flow but shortens the time to full repayment and reduces the outstanding balance faster. Anyone planning to leave the fixed-rate period earlier should first know when that is possible without an early repayment penalty. The higher repayment itself is a deliberate trade-off between ongoing liquidity and faster wealth-building.
What is the difference between cash flow and yield?
Yield is a relative figure (e.g. rental yield as a % of the purchase price), cash flow is a concrete euro amount per month. The two complement each other – ideally a property stands solidly on both.
Should I factor in vacancy?
Yes. A realistic safety margin for rent loss and letting gaps belongs in every robust cash-flow calculation, even if it is often simplified away in day-to-day formulas.
Sources
- § 9 EStG (deductible expenses: interest and depreciation, not principal) — Gesetze im Internet (retrieved on 5 August 2026)
- BFH, judgment of 20 June 2023 – IX R 17/21 (intention to generate income, exception above 250 sqm of living area) — full text at the Bundesfinanzhof (retrieved on 27 August 2026)
- BFH, judgment of 31 January 2017 – IX R 17/16 (intention to generate income during long-term vacancy) — full text at the Bundesfinanzhof (retrieved on 27 August 2026)
This article provides general orientation and does not replace individual tax or legal advice within the meaning of § 3 StBerG. Interest rates, cost assumptions and the bands mentioned are illustrative example values and not an investment recommendation for a specific property.