Positive cash flow in rental property investing: calculations and strategies to generate income

In a rental property project, the question of profitability is not limited solely to the property’s value or the prospect of future capital gains. For many investors, the main issue is above all the cash generated each month by the property. That is exactly what cash flow measures.

We speak of positive cash flow in rental property investing when the property generates excess cash rather than requiring a financial contribution from the owner. However, achieving positive cash flow is not always simple. Property prices, financing conditions and taxation can strongly influence the financial balance of an investment.

In this article, we will look at how positive cash flow works in rental property investing, how to calculate it precisely, and which strategies make it possible to optimize it in order to secure the profitability of your investment.

What is positive cash flow in rental property investing?

When a property is rented out, it generates regular income in the form of rent. At the same time, this investment involves various expenses: loan repayment, condominium fees, insurance, property tax and maintenance of the property.

Cash flow simply corresponds to the difference between this income and all the expenses related to the property.

When the rent received covers all expenses and there is cash left over, this is known as positive cash flow in rental property investing. The investor does not need to add money out of pocket: the property pays for itself and even generates a surplus each month.

Conversely, if expenses exceed rental income, cash flow becomes negative. In this case, the owner must add a personal contribution to balance the project.

Cash flow and rental yield: two different concepts

Cash flow is sometimes confused with rental yield. Yet these two indicators do not measure exactly the same thing.

Rental yield expresses the overall return of a real estate investment by comparing rent with the purchase price of the property. It helps assess the project’s performance on paper.

The return on equity (“cash-on-cash return” in English) is a very important measure that is often poorly known or set aside by beginners. This metric represents the return on your money (equity). It is important to know this return because it represents the true return that you could use to compare it with other types of investment.

In the chart above, we can see the difference between returns expressed on the basis of the purchase price without a mortgage loan ( 1 and 2 ) and on the basis of the equity invested ( 3 and 4 ).

1 : rents / purchase price
2 : (rents – vacancy – maintenance costs) / purchase price
3 : (rents – interest) / equity
4 : (rents – interest – vacancy – maintenance costs) / equity

Cash flow (below) focuses on the actual cash generated each month. It takes the financing of the property and recurring expenses into account, which makes it a particularly useful indicator for measuring the financial balance of a real estate investment.

The chart above shows the difference between the cash flow generated with a mortgage loan ( 2 to 5 ) and without a mortgage loan ( 6 to 8 ) relative to the same rent received ( 1 ).

1 : rent received
2 : mortgage interest
3 : maintenance costs
4 : vacancy
5 : cash flow with a mortgage lower but return higher
6 : maintenance costs
7 : vacancy
8 : cash flow without a mortgage higher but return lower

A property can therefore show attractive profitability while generating lower cash flow if loan instalments or certain expenses are high.

Why positive cash flow is a key indicator for an investor

In a rental property project, several indicators can be used to assess the performance of an investment: gross yield, net yield, return on equity, asset value or capital gain potential. Cash flow provides a different reading because it measures the cash actually generated by the property on a day-to-day basis.

For many investors, this indicator is an essential benchmark for checking whether the project remains financially balanced over time.

Securing the financial balance of the investment

A real estate investment generally fits into a long-term strategy. Throughout the mortgage term, the owner must ensure that the rent received is sufficient to cover the expenses related to the property.

When cash flow is positive, the project generates a safety margin. This additional cash can help absorb certain unexpected expenses, such as occasional works or a vacancy period.

Conversely, negative cash flow means that the investor must add money every month to finance the property. This situation is not necessarily a problem, but it requires sufficient savings capacity to remain sustainable over time.

Generating additional income

Cash flow can also represent a source of additional income. In the case of a well-optimized investment, the difference between rent and expenses can produce a monthly surplus.

Some investors use this cash to:

• supplement their income
• build savings
• finance new real estate projects

Making it easier to build a real estate portfolio

Positive cash flow can also play a role in the ability to develop a real estate portfolio. Indeed, the cash released by a first investment can help secure the projects that follow and thus strengthen your real estate investment strategy.

In some cases, it can help absorb the first years of a new investment, when expenses are higher or when work is required.

A useful indicator, but not enough on its own

Even though it is often sought after, positive cash flow should not be the only decision criterion.

In some very dynamic property areas, high purchase prices can limit the ability to generate positive cash. Yet these markets may offer substantial appreciation potential over the long term.

Conversely, a property showing high positive cash flow may be located in an area where rental demand is more fragile or where the property’s appreciation is limited.

The analysis of a real estate investment must therefore always combine several elements: profitability, location, risk level and market outlook.

How to calculate the cash flow of a rental property investment

Income to take into account

The first step is to identify all income related to the property. In most cases, this mainly means the rent collected from the tenant.

However, some investments can generate other additional income. For example, a property may include a parking space rented separately, a cellar or a storage area. In some situations, these elements can represent significant additional income.

Expenses to include in the calculation

To determine the actual cash flow of a rental property investment, it is essential to include all the expenses related to the property. Several categories of expenses must be considered.

The first generally corresponds to the monthly mortgage payments, which include repayment of principal and interest.

Use our mortgage calculator to simulate your purchasing capacity and monthly payments with full transparency.

You should also include non-recoverable condominium fees, property tax, rental management fees if a professional manages the property, as well as maintenance and upkeep expenses.

In some cases, it may be relevant to plan an estimate for future works or equipment replacement in order to anticipate expenses over the long term.

Finally, taxation is a decisive factor. Taxes can have a significant impact on final cash flow.

Cash flow formula

Once all income and expenses have been identified, the calculation becomes relatively simple.

Cash flow corresponds to the difference between rental income and the total expenses related to the investment. In other words:

cash flow = rental income – total expenses

To obtain a more precise view, some investors also distinguish several levels of analysis: cash flow before tax, cash flow after tax or the net cash actually available.

A practical example of positive cash flow calculation

To better understand how cash flow works in practice, let us take a simple example of a rental property investment.

Let us imagine the purchase of an apartment intended for rental in a medium-sized city, using the values from the charts shown earlier regarding profitability and cash flow.

The property is purchased for CHF 700’000, with 60% financing (CHF 420’000) over 10 years at a rate of 2.00%. The monthly loan payment, without amortization, amounts to CHF 700.

The property is then rented out for CHF 2’350 per month, representing annual rental income of CHF 28’200.

In this example, the monthly expenses are as follows:

• Monthly loan payment: CHF 700
• Monthly maintenance costs (property tax, condominium fees, maintenance) 1% of the property price = CHF 583.33
• Vacancy: 2 months every 4 years -> (2’350*2)/4 = 1’175.-/year => CHF 97.92 / month

The total monthly expenses therefore amount to 1’381.25.

Cash flow calculation (without amortization)

In this example:

• Rental income: CHF 2’350.00
• Total expenses: CHF 1’381.25

The result is therefore: cash flow = 2’350.00 – 1’381.25 = CHF 968.75

Cash flow is positive, and the investor does not need to add money to balance the project.

Cash flow calculation (with amortization)

Let us now add the notion of amortization (progressive repayment of the borrowed capital, distinct from the payment of interest). Let us imagine annual amortization of 5% of the mortgage amount, which in our example means 420’000 * 5% = 21’000 / year (1’750/month).

Our monthly cash flow result becomes: 2’350.00 – 1’381.25 – 1’750.00 = -781.25

In this case, the owner must add money every month, here 781.25, to break even. Cash flow is therefore negative. On the other hand, each month, the value of the property increases and as a result the return on equity also increases. Also keep in mind that in this scenario interest will decrease over time as the mortgage debt falls thanks to amortization.

What cash flow should you target and how can you achieve it in rental property investing

The goal of positive cash flow attracts many real estate investors, but the level of cash that can actually be achieved depends on several parameters: property price, rent level, financing cost and applicable taxation.

Rather than targeting a specific amount, it is often more relevant to assess the overall balance of the project. Depending on the strategy adopted, an investment can generate cash flow close to break-even, slightly positive, or clearly higher.

Cash flow close to zero: a common situation

In some property areas where purchase prices are high, achieving clearly positive cash flow can be difficult. Loan instalments absorb a large share of the rent received.

In this context, many investors consider that cash flow close to break-even remains satisfactory. The property finances itself through rent, while loan repayment gradually makes it possible to build real estate wealth.

Moderate positive cash flow to secure the investment

A cash surplus, even a limited one, can improve the financial security of a rental investment. A margin of a few dozen euros per month can, for example, make it easier to absorb certain unexpected expenses.

This surplus can also be used to build a reserve for future works or vacancy periods. For many investors, the goal is therefore to achieve slightly positive cash flow in order to secure the project’s financial balance.

High cash flow: a specific strategy

Some investors instead look for higher cash flow, sometimes several hundred euros per month. This approach generally requires combining several optimization levers.

It is often based on a more active analysis of the real estate market and on strategies that make it possible to increase rental yield. Several methods can help improve the cash generated by an investment.

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Buy a property below market price

The purchase price plays a decisive role in the profitability of a rental investment. The more expensive the property is to buy, the more loan instalments are likely to weigh on the project’s financial balance.

Some investors therefore look for properties offered below their market value, for example homes requiring renovation work or properties poorly valued by their owner. This purchase margin can make it easier to achieve positive cash flow.

Invest in areas with higher rental yield

Gaps between purchase prices and rents vary greatly depending on cities and districts. In some areas, rents remain relatively high compared with property prices.

These markets often offer more favorable rental yield, which increases the chances of generating positive cash.

Analyzing the local market is therefore an essential step before any investment.

Optimize financing conditions

Financing directly influences the level of cash generated by a rental investment. The loan term, the interest rate and the down payment level can change the project’s financial balance.

A longer-term loan, for example, makes it possible to reduce monthly loan payments, which can improve monthly cash flow. Creating competition between banks or negotiating loan conditions can also help optimize financing.

Increase rents

The ability to generate positive cash flow also depends on the level of rent the property can achieve on the market.

Renovation or improvement work can make it possible to increase the property’s attractiveness and therefore its rental profitability. A modernized kitchen, better insulation or an optimized layout can, for example, justify higher rent.

Reduce certain expenses

The expenses related to a rental investment can sometimes be optimized. Careful expense management makes it possible to identify certain costs that can be reduced or better anticipated.

Direct management of the property, optimization of insurance contracts or analysis of condominium fees can, for example, help improve the project’s financial balance.

Adapt the rental strategy

Finally, the rental method can have a major impact on the profitability of a real estate investment. Some strategies make it possible to increase rental income compared with a traditional rental arrangement.

Furnished rental or dividing a property into several units can generate higher rents. These approaches nevertheless require more active management and a good knowledge of the local market.