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Cash flow and return on equity
Does a rental property carry itself?
A financed rental property carries itself when the base rent covers the non-recoverable costs and the monthly instalment. Anything left over is positive cash flow. Return on equity additionally shows what the capital you put in earns after interest.
Cash flow = base rent − non-recoverable costs − instalment · Instalment = loan × (interest + repayment) ÷ 12 · Return on equity = (annual net income − interest) ÷ equity × 100
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How do you calculate the cash flow of a rental property?
Cash flow is the simplest honest question to ask a financed property: is there money left at the end of the month, or does money have to go in? The calculation is base rent minus non-recoverable costs minus the instalment.
The instalment is what goes to the lender and consists of interest and repayment. Annually it is the loan amount multiplied by the sum of the interest rate and the initial repayment rate; divided by twelve it gives the monthly instalment.
Negative cash flow is not automatically disqualifying, because repayment is not really an expense but wealth building: it reduces your outstanding balance. What matters is whether you can carry the monthly shortfall indefinitely and without strain — including through a vacancy or an unexpected repair.
| Total investment | purchase price × (1 + purchase costs in %) The amount that actually has to be raised. |
|---|---|
| Loan amount | total investment − equity Many lenders will not finance the purchase costs. |
| Monthly instalment | loan × (interest rate + repayment rate) ÷ 12 The initial instalment. The repayment share grows over time. |
| Monthly cash flow | base rent − non-recoverable costs − instalment Before tax. Negative means a monthly top-up. |
What is return on equity, and why is it higher than rental yield?
Return on equity measures what your own money earns — not what the property as a whole earns. It is the annual net income less interest, divided by the equity you put in.
It usually comes out above net rental yield, and the reason is leverage: part of the property is paid for with the lender’s money, but the entire return stands against your equity. As long as the property’s return exceeds the interest rate, financing lifts return on equity.
Leverage cuts both ways. If the property’s return sits below the interest rate, the same mechanism drags return on equity down — the faster the less equity is involved. Every leverage calculation therefore owes an answer to what happens if rates are higher when the fixed period ends.
Repayment stays out of this calculation — on purpose. It is not an expense but a transfer from cash into ownership. Treating it as a cost makes the investment look worse than it is — just as ignoring negative cash flow makes it look better.
| Formula | (annual net income − interest) ÷ equity × 100 Before tax and excluding repayment, because repayment builds wealth. |
|---|---|
| Leverage helps when | property return > interest rate Return on equity then rises as equity input falls. |
| Leverage hurts when | property return < interest rate Low equity then amplifies the loss rather than the gain. |
| Not included | tax, depreciation, capital growth, interest-rate risk These depend on the buyer and the timing, not on the property. |
How much equity do you need for a rental property?
There is no universal ratio — it depends on the lender, your credit standing, the property and the rate environment. A defensible floor does follow from the cost structure, though: purchase costs create no collateral value, which is why lenders routinely decline to finance them.
In practice that means anyone unable to cover the purchase costs from equity is borrowing beyond the property’s value and pays for it with a higher rate. How much higher is something your lender will tell you — enter it above and the calculator shows immediately what it costs over the term.
The second yardstick is not the lender but your resilience: reserves for vacancy, repairs and rent arrears belong alongside the equity, not inside it. A financing plan that only works at permanent full occupancy is a bet, not an investment.
Property investment — frequently asked questions
How do you calculate the cash flow of a rental property?
Monthly cash flow is the base rent less the non-recoverable costs and less the monthly instalment. A positive figure means the property carries itself; a negative figure means money has to be added each month.
How do you calculate the instalment?
The annual instalment is the loan amount multiplied by the sum of the interest rate and the initial repayment rate. Divided by twelve it gives the monthly instalment. On a 260,000 euro loan at 3.5% interest and 2% repayment that is 14,300 euros a year, or about 1,192 euros a month.
What is return on equity for a rental property?
Return on equity is the annual net income less interest, divided by the equity invested, multiplied by 100. It measures the return on your own money rather than on the property, which is why it exceeds net rental yield when leverage is working in your favour.
Is negative cash flow always bad?
No. Part of the instalment is repayment, which builds wealth rather than spending it. What matters is whether the monthly shortfall is sustainable — including through vacancies and larger repairs. Negative cash flow that only works at permanent full occupancy is a risk, not a strategy.
Does repayment count as a cost?
No. Repayment reduces the outstanding balance and converts cash into ownership. It appears in cash flow because it leaves your account, but it does not belong in a return calculation as an expense, because it is not money lost. That is why return on equity uses interest only.
How much equity do you need for a rental property?
There is no universal ratio, because it depends on the lender, your credit standing and the property. The practical floor is the purchase costs, since they create no collateral value and are therefore routinely not financed. Reserves for vacancy and repairs should exist on top.
What is leverage in property investment?
Leverage describes the effect of borrowed money on return on equity. When the property’s return exceeds the interest rate, return on equity rises the less equity is used. When it falls below the interest rate, the same mechanism amplifies the loss.
Does the calculator include tax?
No. Tax depends on your personal rate, on depreciation and on the holding period, and therefore on the buyer rather than the property. The calculator deliberately shows the pre-tax picture for year one so that properties stay comparable with one another.
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EchoDestiny Real Estate Intelligence computes cash flow and returns across your entire portfolio, connects them to official market data, and names the source behind every figure.