BiggerPockets Real Estate Podcast - How Much Cash Flow Should Your Rentals Make?

Starting point is 00:00:00 How much cash flow should your rental actually make? Because it may sound great if a property will cash flow $200 a month, but if you have to invest $100,000 to buy that deal, that's a bad deal. So today I'll explain how to think about cash flow like an experienced investor, how to calculate the number correctly, how to decide what your minimum cash flow 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

Starting point is 00:00:28 your earning, and I'll give you my take on how to adjust your cash flow 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 IRAs 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 Bigger Pockets, and a guy who has literally analyzed thousands, I don't know, maybe tens of thousands of real estate deals.

Starting point is 00:01:19 And today, I'm sharing how I think about cash flow as I continue to buy residential properties in 26. We're going to start today by just defining cash flow 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 cash flow. The proper definition of cash flow 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, it includes taxes and insurance, but it also includes some of those variable expenses like repairs, maintenance, vacancy, turnover costs, all that has to be calculated before you figure out cash flow. There are a lot of videos out there and people out there who say

Starting point is 00:02:08 cash flow is just taking your rent and subtracting your mortgage payment. That is not correct. And that is not the cash flow that we are talking about in this episode. We're talking about real cash flow 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 cash flow is, how do you go about measuring this? Because you can measure it in two different ways. The first way is the absolute amount.

Starting point is 00:02:47 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 $100 per door in cash flow. Now, that is valuable. There is use to that, but that's actually not the way that I recommend you think about cash flow. 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 cash flow.

Starting point is 00:03:14 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 cash flow 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 a month in cash flow, that's $6,000 a year and you divide that by $100,000 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

Starting point is 00:03:44 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 buy 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.

Starting point is 00:04:12 Again, we'll use that as our example. that's $6,000 a year in cash flow. If you invested $100,000, 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 $6,000 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.

Starting point is 00:04:51 You can go to BiggerPockets.com slash 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. All right. So we've got to take a quick break, but we'll be be right back talking more about how much cash flow your rentals will make right after this. I have an uncomfortable question for you. If your rent collection drop to 80% next month, how long would your cash flow hold up? What about 70% for the next three months?

Starting point is 00:05:29 Would your cash reserves cover it? I talk all the time about scenario planning. Smart investors don't just model the upside. They also pressure test the downside. This is even more important in a down market. And that's why I like Stessa's strong. stress test report. It lets you model different rent collection scenarios, adjust expense assumptions, and instantly compare the results to your real bank balances. It's one of 12 professional grade

Starting point is 00:05:54 reports inside Stessa Pro. Try it for yourself. Visit stessa.com slash mkTG slash bigger pockets and get six months of Stessa Pro for free because it's better to discover your risk in a report than in a recession. If the new year means getting rentals back in order, listings are a good place to start. Avail, part ofrealtor.com, makes it simple to list a rental for free and get it in front of millions of renters. One listing, one click, post it across 24 top rental sites. Avail even helps generate listing titles and descriptions to save time. More visibility means fewer days sitting vacant and getting your property rented quickly. It's a fast, free way to find renters without the usual hassle. Get started at Avail.co.com slash bigger pockets. That's A-V-A-I-L-C-O-Bigger pockets.

Starting point is 00:06:39 There are two kinds of real estate investors, those who have reviewed their insurance, and those who think that they have. Most don't realize their coverage wasn't built for how they actually invest. Vacancy periods, rehabs, short-term rentals, or LLC-held properties. These gaps surface only when filing claims. That's why investors work with NREG. They specialize exclusively in real estate investors, understanding portfolios, risk at scale, and cash flow protection. One claim can erase years of returns. If you own a rental property, don't assume you're covered.

Starting point is 00:07:05 Have NREG review your insurance with someone who gets investing at NREG.com. slash BPod. That's NR-E-I-G.com slash B-Pod. You've upgraded how to buy properties, but did your insurance get the memo? When investors start scaling, insurance can't be an afterthought. Most policies were designed for a single property, not multiple rentals, LLC ownership, short-term stays, or properties mid-rehab. That's where blind spots can creep in.

Starting point is 00:07:29 NREG works exclusively with real estate investors. They understand portfolios, how risk compounds as you grow, and why insurance should protect your upside, not just a checkbox. One uncovered claim can undo years of progress. Before your next acquisition, review your insurance. Talk to NREG and get investor-specific coverage from specialists who actually understand real estate at NREG.com slash BPPod. That's N-R-E-I-G.com slash B-PPodd. Welcome back to the Bigger Pockets podcast. I'm Dave Meyer.

Starting point is 00:08:01 Today we're talking about how much cash flow your rental should make. Let's jump back in. So with that said, that brings us back to our original question. how much cash flow 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 cash flow. You'll probably hear a lot of investors talk about this,

Starting point is 00:08:23 day one cash flow, walking cash flow. 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% cash flow. Now, of course, if you can get cash flow 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

Starting point is 00:08:53 one cash flow. So when I think about cash flow, what I am thinking about is what is known as the stabilized cash flow. 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

Starting point is 00:09:23 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're getting it to be fair for what the money. market would bear. The other way that you do this and is very common is through value at. 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.

Starting point is 00:09:50 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 $1,000 bucks a month to $1,500 a month. And your cash flow 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

Starting point is 00:10:28 burr or something like that. But my metric for cash flow 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 8 to 10%. Depends on who you ask, You reinvest your dividends, a lot of stuff like that.

Starting point is 00:11:07 But 8 to 10% is a pretty good rule of thumb. Now, real estate offers many ways of generating returns that aren't just cash flow. But the way I think about it is if I can get a 7% cash on cash return, my loan paydown, 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 8 and 12%,

Starting point is 00:11:48 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 let me just give you a quick example here. if you invest at 8% return, if you take $100,000 invested in an 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.

Starting point is 00:12:18 But if you invested at 12%, just the difference between 8% and 12%, you will actually have $9,64,000, 9.5 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,

Starting point is 00:12:44 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.

Starting point is 00:13:06 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 cash flow. 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 cash flow number. So stick with us. There are two kinds of real estate investors. Those who have reviewed their insurance and

Starting point is 00:13:34 those who think that they have. Most don't realize their coverage wasn't built for how they actually invest. Vacancy periods, rehabs, short-term rentals, or LLC held properties. These gaps surface only when filing claims. That's why investors work with NREG. They specialize exclusively in real estate investors, understanding portfolios, risk at scale, and cash flow protection. One claim can erase years of returns. If you own a rental property, don't assume you're covered. Have NREG review your insurance with someone who gets investing at NREG.com slash BPPod. That's NREIG.com slash BP pod. There are two kinds of real estate investors, those who have reviewed their insurance, and those who think that they have. Most don't realize their coverage wasn't built for how they

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Starting point is 00:17:01 Stop letting outdated lending practices hold you back. That's hostfinancial.com where your property's potential meets unlimited financing. Welcome back to the Bigger Pockets podcast. I'm Dave Meyer talking about how much cash flow should your rental make. I shared before the break what cash flow is, how to use cash on cash return rather than the absolute number as your main metric for calculating cash flow. and why generally speaking, I try to achieve 7% stabilized cash flow for the deals that I buy. But the truth is, I don't get 7% on every single deal.

Starting point is 00:17:40 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 cash flow and appreciation are a tradeoff. In markets or in properties where you're going to get the most possible cash flow, 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 cash flow.

Starting point is 00:18:10 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. Cash flow there, harder to get. But they have great economies. Property values are probably going to keep going up. Maybe not this year, but long term, those are markets where you're going to see good property appreciation.

Starting point is 00:18:35 And so you have to think about what is more important to you at this stage in your life. Appreciation or cash flow. Again, earlier in your career, I would generally say appreciation. Later in your career, cash flow. Now, I have said this a lot when I talk about the great story. and the upside era, I do not buy properties that do not cash flow. So even though I just said all that about appreciation, I do not think in this kind of market that it is prudent to buy anything that is not cash flowing. The primary strategy that works right now in this era is buying and

Starting point is 00:19:09 holding on for a long time. And even though cash flow is probably not the best way to build your net worth over the next 20 years, holding on to those properties is. And cash flow is the way you ensure you hold on to your properties? Because if you buy a property that's negative $200 a month cash flow 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 on to these rental properties for a long period of time.

Starting point is 00:19:53 And cash flow allows you to be really defensive. So I buy for stabilized cash flow always. I buy some deals that are negative cash flow the day I buy them. That's actually quite common. There are a lot of times day one cash flow 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 cash flow. So when you're thinking about these tradeoffs between cash flow and appreciation, I like to think of it as a spectrum.

Starting point is 00:20:23 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.

Starting point is 00:20:47 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. 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

Starting point is 00:21:08 for those upsides to hit, that I can still hold on to this property and I'm still making a decent return. Now, on the other side of this, 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

Starting point is 00:21:38 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 cash flow. 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 cash flow, 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 cash flow 10, 15 years from now, then you might take that lower cash flow 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 at, that you're going to be in the path of progress. Maybe there's that zoning upside.

Starting point is 00:22:18 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 stand investor 16 years ago until today, I underwrite pessimistically. I don't like looking at best case scenarios, putting that in the bigger pockets 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

Starting point is 00:23:00 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 are 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.

Starting point is 00:23:48 So my last two pieces of advice to you, one, calculate your cash flow properly. Do not omit any expenses in there. And number two, be very careful about the assumptions you put into the calculator, because the bigger pockets calculator, it'll do the math right for you. But if you put in 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 cash flow. 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

Starting point is 00:24:33 the United States. So hopefully this has helped you see that cash flow 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 Bigger Pockets podcast. I'm Dave Meyer. Thank you all so much for listening to this episode. We'll see you next time. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by E&K, copywriting is by Calicoe Content, and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter,

Starting point is 00:25:13 please visit www.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk. So use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose. And remember, past performance is not indicative of future results. Bigger Pocket's LLC disclaims all liability for direct, indirect, consequential, or other damages arising from a reliance on information presented in this podcast. Walters-Cleward knows the accountant's dinner all too well.

Starting point is 00:25:39 Lukewarm coffee, cold takeout, and endless manual data entry. It's time to change the menu with a tax workflow that actually flows. CCHI firm by Walters-Cluort is built to help you work smarter, file faster, and head home on time. Visit shoptacks.orguler.com to learn. more.

BiggerPockets Real Estate Podcast - How Much Cash Flow Should Your Rentals Make?

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