How Much Cash Flow Should Your Rentals Make?

Dave:
How much cashflow should your rental actually make? Because it may sound great if a property will cashflow 200 bucks a month, but if you have to invest a hundred grand to buy that deal, that’s a bad deal. So today I’ll explain how to think about cashflow like an experienced investor, how to calculate the number correctly, how to decide what your minimum cashflow target should be. I’ll walk you through a simple deal example and explain why cash on cash return matters much more than the raw dollar amount you’re earning. And I’ll give you my take on how to adjust your cashflow analysis for the 2026 market. And I’m just going to go ahead right now and spoil this entire episode and say that my answer is 7%. I want a 7% cash on cash return by year two for any property I buy right now, but that is just my number. Yours is going to be different. And by the end of this episode, you’ll know exactly how to calculate your number. So if you want to stop guessing about IRRs and cap rates and start evaluating deals that will build your net worth. You can’t miss this episode.
What’s up everyone? I’m Dave Meyer, chief Investment Officer at BiggerPockets, and a guy who has literally analyzed thousands, I don’t know, maybe tens of thousands of real estate deals. And today I’m sharing how I think about cashflow as I continue to buy residential properties in 2026. We’re going to start today by just defining cashflow for anyone who is new around here or for people who are confused on how to calculate it because there’s a lot of bad information out there about what is cashflow. The proper definition of cashflow is taking your total income, so that’s all of your rent for a specific property, and then subtracting all of your expenses. That does include your mortgage and includes taxes and insurance, but it also includes some of those variable expenses like repairs, maintenance, vacancy, turnover costs. All of that has to be calculated before you figure out cashflow.
There are a lot of videos out there and people out there who say cashflow is just taking your rent and subtracting your mortgage payment. That is not correct, and that is not the cashflow that we are talking about in this episode. We’re talking about real cashflow here. So keep that in mind as we go on because if you hear people say, I’m getting a 10 or 15% cash on cash return, honestly, I don’t think it’s that they’re getting good deals. I think that they’re actually calculating it wrong. So make sure that you’re doing this right and you keep your expectations appropriate to the right number and the right way of calculating it. So now that we know what cashflow is, how do you go about measuring this? Because you can measure it in two different ways. The first way is the absolute amount, just how much money are you making each month per unit or per property?
You hear a lot of people say, I want to get at least a hundred dollars per door in cashflow. Now that is valuable. There is use to that, but that’s actually the way that I recommend you think about cashflow. Instead, I recommend you think about your rate of return. So rather than the total amount of dollars, I want you to measure how efficiently your dollars are earning cashflow. And to do that, you use a metric called cash on cash return. It’s really easy to calculate. All you have to do is take the total amount of cashflow and divide it by the total amount of money that you put into that property. So just as an example, if you’re making 500 bucks a month in cashflow, that’s $6,000 a year and you divide that by a hundred grand that you invested into this property, that’s a 6% cash on cash return.
And the reason I like measuring this is because as an investor, one of your main jobs is to figure out a way to use your money most efficiently because most of us don’t have unlimited amounts of capital to just keep going by property and property and property. So you need a measure of efficiency to make sure, hey, if I’m going to go buy a property, this is the best use of my money. And that’s why you need to use cash on cash return, your rate of return rather than your absolute return just as a sort of extreme investment, right? You might say, I’m getting 500 bucks a month. Again, we’ll use that as our example. That’s $6,000 a year in cashflow. If you invested a hundred thousand dollars 6% cash on cash return, that’s pretty good. That’s a pretty good cash on cash return right now.
But if you invested say 500 grand to earn that six grand a year in profit, that’s just over a 1% cash on cash return, which is not very good, you could do better in a savings account. So it’s not really worth your time or money to make that investment. So that’s why we use the rate of return. And for those of you out there who may be math averse or don’t memorize the formula I just mentioned, I don’t blame you first of all, but that’s why at BiggerPockets we provide tools that will calculate these things for you. You can go to biggerpockets.com/pro and use our calculators and they can give you all of this information. So during this episode, just concentrate more on the principles of understanding what these numbers mean. So when you go and use the calculators, you understand how to interpret the numbers that are in front of you. Alright, so we got to take a quick break, but we’ll be right back talking more about how much cashflow your rentals will make right after this.
Welcome back to the BiggerPockets podcast. I’m Dave Meyer. Today we’re talking about how much cashflow your rentals should make. Let’s jump back in. So with that said, that brings us back to our original question, how much cashflow should your rental make? And I want to be clear when I explain my number and what your number should be that I am not necessarily talking about day one cashflow. You’ll probably hear a lot of investors talk about this day one, cashflow walking cashflow. That’s the idea that if you go out and buy a property on the MLS off market, whatever the day that the person hands over the keys to you, you’re happily the owner of this new property that you’re going to be earning 3% or 5% or 10% cashflow. Now of course, if you can get cashflow on day one, that’s awesome, but the realities of the market in 2026 are that it’s pretty hard to find great cash flowing deals on the market with day one cashflow.
So when I think about cashflow, what I am thinking about is what is known as the stabilized cashflow. This is a term that real estate investors use to describe the period after they’ve executed their business plan and get the property to the state that it should be in. Because as an investor, what you’re likely doing in today’s market, the better deals that you can buy are places where one, you go and buy a duplex, let’s say, and it’s been owned by someone who’s owned it for 20 years and they haven’t really kept up with market rents. And so you buy that property and you bring those rents up to fair market value. That’s stabilization, right? That could be part of your business plan. You are getting it to be fair for what the market would bear. The other way that you do this and is very common is through value add.
So you buy a property that maybe has low rents because it’s not a great property, it’s not in good condition, it is not meeting the demands of the market right now. So you go out and renovate it, you add a new kitchen, you add a new bathroom, you put in new floors, you throw some paint in there, and then all of a sudden your rents go from a thousand bucks a month to 1500 bucks a month. And your cashflow goes from let’s say 2% cash on cash return up to 8% cash on cash return. So when I spoiled my answer before and said that my number right now that I’m looking for is 7% cash on cash return, I’m talking about stabilized. I’m not expecting 7% the day I go out and buy that property. I’m expecting it by the time I have gotten my business plan into place.
Usually I try to do that within a year, but it can take 18 months if you’re doing a slow bur or something like that. But my metric for cashflow is a 7% cash on cash return by stabilization. Now, if you’re wondering why 7%, there’s two reasons. First and foremost, you have to think about what else you can be doing with your money right now. I have to get returns that are better than my other options out there. I need to beat the stock market. I don’t know if I’ll beat crypto in any given year, but I want to beat the average for any other asset class out there. Historically, the stock market, which I think is the main asset class you should be comparing to returns, eight to 10%, depends on who you ask if you reinvest your dividends, a lot of stuff like that.
But eight to 10% is a pretty good rule of thumb. Now, real estate offers many ways of generating returns that aren’t just cashflow. But the way I think about it is if I can get a 7% cash on cash return, my loan pay down amortization is usually getting me 3% return, just doing that, then the tax benefits that I get are probably getting me at least a 2% return. So for me, if I get that 7% cash on cash return, I know I am getting at least a 12% annualized return, which is significantly better than the stock market. And if you’re thinking that’s not that big of a difference, the difference between eight and 12%, what does that matter? I should go out and buy the stock market because 8% I don’t have to do anything. And yes, for rental property investing, you’re going to have to work to get that 12%.
But lemme just give you a quick example here. If you invest at 8% return on, if you take a hundred thousand dollars invested in 8% return over 20 years compounded you’re going to have $466,000 at the end of those 20 years, that’s pretty great. You’re making 450% on your money over that time. But if you invested at 12%, just the difference between eight and 12%, you’ll actually have $964,000, nine and a half times your money. That is double what you get at 8%. That is the power of compounding. When you are compounding your investments, small differences in your rate of return make huge differences over the long run. And so for me, that’s why my minimum total annualized return is 12%. And if I can get a 7% cash on cash return, I know I can hit that 12%. So that’s the primary reason. The second reason, and I won’t get into all the details here, but I basically want my cash on cash return to be higher than the interest rate on my loan.
And I can get six and a quarter, six and a half right now on investor loans. And so if I can get 7% cash on cash return, that’s better than my interest rate and I really like that. So 7% is the number I am looking for, but I got to admit, sometimes I buy deals with less cashflow. Sometimes I buy deals with more because it comes down to your personal strategy and where you are in your investing career. And after this break, I’m going to show you how you can calculate your cashflow number. So stick with us.
Welcome back to the BiggerPockets podcast. I’m Dave Meyer talking about how much cashflow should your rental make. I shared before the break, what cashflow is, how to use cash on cash return rather than the absolute number, as your main metric for calculating cashflow and why? Generally speaking, I try to achieve 7% stabilized cashflow for the deals that I buy. But the truth is I don’t get 7% on every single deal. Sometimes it’s a little bit less, sometimes it’s a little bit more because there’s this kind of reality that exists in real estate, which is that cashflow and appreciation are a trade-off in markets or in properties where you’re going to get the most possible cashflow. They’re typically in areas or their properties that are not going to appreciate as much. That’s not always true, but that is a good thing to keep in mind as you think about these questions.
If you want maximum appreciation, then you’re probably going to get less cashflow. Just think about markets that have appreciated a lot over the last couple of decades. COVID was different, but if you think about San Francisco or Austin, Texas or Denver or Nashville, those are places where you’ve seen massive appreciation, cashflow there, harder to get, but they have great economies. Property values are probably going to keep going up, maybe not this year, but those are markets where you’re going to see good property appreciation. And so you have to think about what is more important to you at this stage in your life, appreciation or cashflow Again, earlier in your career. I would generally say appreciation later in your career cashflow. Now, I have said this a lot when I talk about the great stall and the upside era, I do not buy properties that do not cashflow.
So even though I just said all of that about appreciation, I do not think in this kind of market that it is prudent to buy anything that is not cashflowing. The primary strategy that works right now in this era is buying and holding on for a long time. And even though cashflow is probably not the best way to build your net worth over the next 20 years, holding onto those properties is, and cashflow is the way you ensure you hold on to your properties. Because if you buy a property that’s negative 200 bucks a month cashflow and you say, Hey, I got a good job. I could foot the bill, I’ll pay that out of pocket, sure, but if you lose your job, you might be tempted to sell that property. And with the transaction cost in real estate, you’re often selling at a loss even if your property value stays the same because you have to pay out your agents and commissions and taxes and all that.
And so the key to succeeding in the upside era is holding onto these rental properties for a long period of time and cashflow allows you to be really defensive. So I buy for stabilized cashflow always. I buy some deals that are negative cashflow the day I buy them. That’s actually quite common. There are a lot of times day one, cashflow is negative, but I have to have a plan in place to stabilize that property 12 to 18 months from now, and I’m going to have positive cashflow. So when you’re thinking about these trade-offs between cashflow and appreciation, I like to think of it as a spectrum. Whereas if there is a property that is amazing upside, right? We talk about the upsides on the show all the time, maybe it has great rent growth potential. Maybe it’s in the path of progress, there’s zoning upside.
If it has a lot of upside, I’ll take a lower cash on cash return, I would actually take a cash on cash return as low as 3%. If I think there’s really good upside, it’s in an amazing neighborhood. There’s a ton of investment going on around this property. I’ve done this several times in my career and they’ve been some of the best deals I’ve ever bought because I’m not focused on cash flow. I’m thinking this is a great opportunity to build equity to build my net worth, but I’ve got this 3% cash on cash return that ensures that even if it takes three or four or five years for those upsides to hit, that I can still hold onto this property and I’m still making a decent return. Now, on the other side of the spectrum, if there’s a property with limited upside, maybe it’s in a well established neighborhood that’s not really changing that much.
Rents are probably not going to grow. It’s just kind of a solid asset, but there’s not as much excitement around what the future holds, then I need a much higher cash on cash return. So I think at least an 8% stabilized cash on cash return there, maybe ideally even higher cash on cash return for that kind of deal. And I suggest that this is the way that you think about your own numbers. So again, first you’re thinking about your own goals and whether you want to favor appreciation or cashflow. And then when you’re evaluating any individual deal, you have to think about, why am I doing this? If I’m buying it just for cashflow, that’s totally fine. But if you’re young in your career and you’re saying, I’m just trying to build my net worth now so that I can get cashflow 10, 15 years from now, then you might take that lower cashflow deal.
If it’s in a great neighborhood, just make sure that those upsides are actually there, that you’re going to be able to do value add, that you’re going to be in the path of progress. Maybe there’s that zoning upside. Maybe you think rents are going to go up if all those things are there, you can take a lower cash on cash return today. So that’s how you figure out your own number. And before we go, there’s just one other thing that I think is really important. I try to mention a lot on this show, but I do think is super important in today’s day and age. I always, from the first day that I started as a real estate investor 16 years ago until today, I underwrite pessimistically. I don’t like looking at best case scenarios. Putting that in the BiggerPockets calculator and then hoping those things turn out, that is not what you should do.
I know it’s exciting to think you’re in this great neighborhood and rents are going to go up, but what if they don’t? I really recommend to you to underwrite. In the worst case scenario, don’t assume rents are going to go to the top of the market. Don’t assume amazing appreciation. Make sure to take into account that your taxes and your insurance and your expenses are probably going to go up because this is the way to protect yourself in today’s day and age. And I know there are people out there saying, this property is going to get a 12% cash on cash return, but their assumptions are very optimistic. They’re a little bit, I would say speculative personally. I know this sounds crazy, but I would rather take a 5% cash on cash return deal that I underwrite pessimistically than a 12% cash on cash return that an agent or a wholesaler or someone else is saying that I can get.
I just think that’s the prudent thing to do. So my last two pieces of advice to you, one, calculate your cashflow properly. Do not omit any expenses in there. And number two, be very careful about the assumptions you put into the calculator because the BiggerPockets calculator, it’ll do the math right for you, but if you put crazy pie in the sky numbers, that’s on you to be honest. And so be really conservative with your numbers and calculate this right, and use these rules of thumb. If you do that, you will be able to find cash flowing deals even in this market. It may not be day one cashflow, it may not be the 1% rule. That thing has been dead for a very long time. But if you follow the instructions we’ve given here, I promise you, you can find these kinds of deals out there in the market today in almost every market in the United States. So hopefully this has helped you see that cashflow is alive and well. You just got to think about it in the right way. That’s what we got for you today on the BiggerPockets Podcast. I’m Dave Meyer. Thank you all so much for listening to this episode. We’ll see you next time.