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  • Writer's pictureElenis M. Camargo

How to Conduct a Cash Flow Analysis for Rental Property Investments



Before we invest in any market, or any asset for that matter, we conduct analysis and let the results tell us whether it’s a smart investment or not.


Conducting analysis prior to making a real estate investment decision is key. Many people use their gut instincts. Maybe they have a hunch that a particular market will appreciate over time and blindly choose any property to convert into a rental. I believe the only way someone can make an investment decision with confidence is to conduct analysis beforehand. In this article I will explain the basics of how I conduct a real estate cash flow analysis, which can help you determine how much profit or loss you could generate from a particular rental property.

This analysis should be set up in an Excel spreadsheet. By building out the template one time you can reuse it over and over to analyze multiple rental properties. This will allow you to compare the cash flows and other essential metrics that can help you make a smart investment decision. The model works great for single family homes but can be expanded for multifamily properties as well. Let’s get started!

First, I will go over each input of the model. Then I will build the model and explain the math involved in the calculations. Lastly, I will provide you with some quick metrics and show you what we can interpret from the model with a real example. I included the model already built out as a free download here, for your convenience.


The Model’s Inputs

We start with the necessary inputs for the model and a brief explanation of each:

  • Monthly Rental Income: Using Zillow you can search for current rental properties in the area of interest to gain an understanding of how much comparable properties are renting for. You can also use Zillow Data to get historical rental pricing data to help you better estimate the rental income you will actually receive. Since this is such an important input in your model, make sure to spend some time researching comparable rentals and be realistic about it. If you overestimate rental income you may end up investing in a property where you lose money each month. If you underestimate rental income you may pass up a great opportunity.

  • Vacancy Loss: Equal to one month’s rent. This is to represent the period that you are searching for a tenant and the property is vacant.

  • Property Management Fee: Most property management companies will charge between 8 and 12 percent of the rent that you collect each month.

  • Property Taxes: Look at the current property taxes in the county records and the tax rate. Beware that when you purchase a property it is reevaluated and the annual tax amount will be adjusted based on the new value of the property.

  • Property Insurance: This can also be estimated, but once you are under contract and you have a four-point inspection (condition of property’s roof, A/C, electrical, and plumbing) conducted you can obtain a proper quote from an insurance agent.

  • Replacement Reserve: An amount we save from each month’s rental income which would be used for any maintenance expenses. From our experience we feel that $50 per month per property is a sufficient amount to cover any standard maintenance expenses.

  • Other Expenses: These include A/C cleaning and filters, pest control, lawn maintenance, mortgage insurance, HOA fees, etc. You can decide if you want your tenants to handle lawn maintenance but we recommend that as a landlord you conduct bi-annual A/C cleaning, provide A/C filters and handle pest control. These are expenses that will help maintain your property and expenses that the tenants will most likely not conduct if they had the option.

  • Down Payment (%): The minimum amount you can put down to avoid PMI (Private Mortgage Insurance) is 20% of the purchase price. Sometimes paying PMI makes more sense than putting more money down. Using this model will help you compare this.

  • Length of Mortgage in Years: A 30-year conventional loan is the most common for single family rental properties. Since there is more risk on the bank side due to the length of the loan the bank will issue a slightly higher interest rate compared to a shorter term loan like 15 years. But a 30-year loan will offer smaller mortgage payments compared to a shorter term loan which is an important factor to be cash flow positive.

  • Annual Interest Rate: There are a few factors that can decide the interest rate you will pay on your loan. Two mentioned above is the amount of money you plan on putting down and the length of the loan. A few others are your credit score and current U.S. treasury rates. The 30-year conventional interest rates tend to follow the U.S. 10-year treasury rate. Discount points are fees paid directly to the lender at closing in exchange for a reduced interest rate. You have an option on how much you want to pay in points. Quick tip: Ask your lender for a table breakdown of the points and interest rate so you can run several scenarios by plugging in different interest rates and points into your model.

  • Closing Costs & Loan Fees: These include the fees paid to the title company, inspection, appraisal, origination fee and points. Your lender should be able to provide you with a closing disclosure when you are pre-approved and it will include an estimation of your closing costs.

  • Renovation Costs: Any one-time expenses that are required to bring the property in good order.

Let’s Build a Model!

Below is the cash flow analysis model that I have set up in Excel. Start by listing out all of the line items in column A. Don’t worry about the actual values yet as I will walk you through those next.





Some key metrics I want to highlight are:

  • Initial Investment: The total out-of-pocket amount that was required to acquire the property and get the property in good-standing. This includes down payment, closing costs and loan fees, and any renovation expenses.

  • Gross Operating Income: The cash flow after we deduct our vacancy loss.

  • Operating Expenses: These include the costs of running and maintaining the home such as property taxes, insurance, A/C cleaning and filters, pest control, and lawn maintenance.

  • Net Operating Income (NOI): Measures a property’s profitability before adding in any costs from financing or taxes.

  • Total Monthly Cash Flow (the bottom line): The amount of monthly profit we will receive once all expenses and financing are paid.

  • Year 1 Cash Flow: The total annual cash flow of year 1 minus the initial investment. This is usually a negative number.

  • Capitalization Rate: Valuation method used to compare investments. Based on a property’s NOI and purchase price we can generate a capitalization rate and compare if it is above or below our desired value. Additionally, with a little bit of algebra we can use the a projected capitalization rate to value a property.

  • Cash-on-Cash Return: Another valuation method used to compare investments. It measures the annual return the investor made on the property in relation to the amount of mortgage paid during the same year.

Below is the math behind the calculations in our model:




Putting the Model to Use


Now that we have the model built out in Excel lets plug in some numbers as an example. I will use the values of the second property we purchased for this example and I will follow the convention that all input values are shaded in blue whereas formulas are in black. Note: I self-manage my properties so I do not include a property management fee.




Once we plug in all of the values we can now evaluate the property and determine whether this is a property we should pursue or not. The first things I look at are the cash-on-cash return and the capitalization rate. In this case the cash-on-cash return and capitalization rate are 28.9% and 14.6%, respectively. These are great numbers way above our ideal threshold of 12% for cash-on-cash return and 10% for the capitalization rate. Let’s now examine the monthly cash flow potential. In this case the property would generate an estimated $361 per month for the first year. It’s important to note that these figures only pertain to the first year of ownership since some of our variables will change. Insurance, taxes, rental income and maintenance expenses will fluctuate over time. A further long-term cash flow analysis would be required. This is something I will address in another article so stay tuned!

It is difficult to say whether the cash flow of $361 per month, or $4,332 per year, is a sufficient return relative to the amount of risk we are taking on. This is why we look at ratios. The two ratios mentioned above, cash-on-cash return and capitalization rate, will help to clarify our question of whether this return is sufficient. Many newbie investors only look at the monthly cash flow as an indication of whether the property is worth investing in. The problem with that method is that one can receive more return in dollars, but not fully realize the amount of risk they are taking on. By using ratios we can essentially compare “apples to apples” which will lead us towards making better investment decisions. I will demonstrate this quickly with two scenarios below.



Property B provides a greater cash flow relative to Property A, but Property B requires more of an initial cash investment. Therefore, Property B has more risk relative to Property A. Hence, the higher cash-on-cash return and capitalization rate of Property A makes Property A the better investment.

Start Your Analysis!

This model is the first step to valuating single-family investment properties. Here is the link again to the pre-built model that you can download for free. It can be expanded in many ways to include a projected 10-year cash flow, estimated annual renovation expenses, and a rental income scenario analysis, among many other features. Now try analyzing some properties that you are interested in and compare the results! If you own a property and have never performed proper analysis, you now have a tool to determine whether your investment was a wise decision. If you have any suggestions as to other real estate investment topics you’d like for me to cover, please leave a comment below.

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