How Much Cash Flow Should Rental Properties Make? A 2026 Guide

Defining Real Cash Flow

• 💡 Cash flow is defined as total income minus all expenses, including mortgage, taxes, insurance, repairs, maintenance, vacancy, and turnover costs.
• ⚠️ It's crucial to distinguish this from simply subtracting the mortgage payment, as many sources incorrectly define cash flow.

Measuring Cash Flow: Rate of Return vs. Absolute Amount

• 🎯 While the absolute dollar amount of monthly cash flow is useful, the rate of return is a more efficient metric for investors.
• 📊 Cash on cash return (total cash flow divided by total invested cash) measures how efficiently your money is earning.
• 💰 For example, $6,000 annual cash flow on a $100,000 investment yields a 6% cash on cash return, whereas the same $6,000 on a $500,000 investment is only a 1% return, which is less efficient.

Stabilized Cash Flow and Target Returns

• 🏡 The target cash flow is stabilized cash flow, which is achieved after executing a business plan (e.g., raising rents to market value or renovating).
• 📈 Dave Meyer's personal target is a 7% cash on cash return by year 2 (stabilization).
• 🚀 This 7% target is chosen because it aims to outperform the stock market's historical 8-10% returns, considering loan amortization (3%) and tax benefits (2%) to achieve a total annualized return of at least 12%.

Cash Flow vs. Appreciation Trade-off

• ⚖️ In real estate, there's often a trade-off between cash flow and appreciation; properties with maximum cash flow may appreciate less, and vice-versa.
• 🔑 For long-term wealth building, especially in the current market, holding properties is key, and cash flow ensures you can hold them even through job loss or unexpected expenses.
• 📉 If a property has limited upside (e.g., stable neighborhood, no rent growth potential), a higher cash on cash return (ideally 8%+) is needed.
• 📈 Conversely, for properties with significant upside potential (e.g., rent growth, path of progress, zoning changes), a lower cash on cash return (as low as 3%) might be acceptable, provided the upside is realized.

Underwriting Pessimistically

• ⚠️ It is essential to underwrite pessimistically, meaning to use conservative assumptions for rent increases, appreciation, and expense growth (taxes, insurance).
• 🧐 A 5% cash on cash return with conservative underwriting is preferred over a 12% return with optimistic or speculative assumptions.
• ✅ Proper cash flow calculation and conservative assumptions are crucial for finding cash-flowing deals in today's market, even if they don't meet outdated rules like the 1% rule.