Rent is not cash flow
Start with supportable rent, not the highest advertised rent you can find. Study comparable rented homes and ask a manager about condition, concessions, tenant demand, and expected time to lease. Separate scheduled rent from the amount you expect to collect.
Subtract vacancy and operating expenses: property taxes, insurance, management, maintenance, owner-paid utilities, association charges, and other recurring costs. Net operating income is generally calculated before debt service and income taxes. Capital replacements need a separate reserve or explicit treatment in your model.
Then subtract debt service and planned replacement reserves to estimate cash available before income taxes. State your definitions so another investor can reproduce the result. Self-management does not mean your time has no value; include a management scenario if your circumstances change.
Monthly rent $1,500 minus $75 vacancy allowance, $200 taxes/insurance, $120 management, and $100 maintenance yields $1,005 before debt. Subtract $650 principal/interest and $100 replacement reserve: modeled cash flow is $255/month before income taxes.
Decision checklist
- Support rent with comparable properties and leasing evidence.
- Separate NOI, debt service, and replacement-reserve treatment.
- Reconcile the final cash-flow number to each line item.
Check your understanding
Using the rental lesson example, what remains after the replacement reserve?
Show the answer
$255 per month before income taxes: $1,500 − $75 − $200 − $120 − $100 − $650 − $100.
Your next action
List all expenses for one hypothetical rental. Mark each as a current bill, estimate, or reserve.
Original teaching framework and hypothetical example. Source directory and editorial approach →