How to calculate 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 (which the tenant bears via the operating-cost statement) drop out of the calculation, since they generally net out. What matters are the costs that actually stick with you as the owner – such as management fees, maintenance reserves, non-apportionable property-tax shares or vacancy risk.

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:

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:

1. 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.
2. Surplus = net cold rent − deductible expenses (can be negative in the first years with high depreciation and high interest).
3. 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?
• 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.

The most common cash-flow mistakes

1. Forgetting the principal repayment. Calculating with only the interest portion systematically overstates cash flow.
2. Not budgeting a maintenance reserve. Even though it only takes effect for tax when actually spent, it belongs in a robust liquidity plan.
3. Ignoring vacancy. Assuming 100% occupancy over the entire holding period is unrealistic.
4. Confusing cash flow and yield. A high rental yield says nothing about monthly liquidity if the financing is calculated tightly.
5. 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.

FAQ

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. It 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.

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.