Every new investor does the same thing. They find a property, subtract the mortgage from the rent, see a positive number, and think they found a cash flowing rental. Then reality shows up about six months later and that positive number is gone.
The problem is almost never the rent amount or the mortgage payment. Those are the two numbers everyone gets right because they are obvious. The problem is everything else. The expenses that do not show up on a listing sheet or a mortgage calculator but show up in your bank account every single month.
Let me walk you through the expenses that most new investors either underestimate or forget entirely.
This is the most common mistake. New investors assume 100% occupancy all year every year. That is fantasy. Even in a hot rental market you will have turnover. When a tenant moves out you have at least two weeks of vacancy for cleaning, repairs, and showing the property. In many markets it is a month or more.
A conservative vacancy rate for a single family rental is 5-8% of gross rent. On a $1,200 per month rental that is $72 to $96 per month you should be setting aside. If you are not accounting for this your cash flow projection is too high by nearly $1,000 a year.
Things break. Water heaters last about 10 years. HVAC systems last 15-20. Roofs last 20-30. Appliances last 8-12. All of these are ticking clocks and when they go off you are writing a check.
The standard rule of thumb is to reserve 8-10% of gross rent for maintenance and repairs. Some investors use the $1 per square foot per year rule instead. On a 1,200 square foot house that is $100 per month. Either way you need to be setting money aside every single month for repairs that may not happen this month but will absolutely happen eventually.
The investors who get caught off guard by a $5,000 HVAC replacement are the ones who spent their cash flow instead of reserving a portion of it. Do not be that investor.
Maintenance is fixing a leaky faucet or replacing a garbage disposal. Capital expenditures are the big ticket items. A new roof, new siding, a full HVAC replacement, new flooring throughout, or a major plumbing overhaul.
Many investors lump these together but they should be tracked separately. Your maintenance reserve handles the day to day repairs. Your capital expenditure reserve handles the big replacements that happen every 10-20 years. A reasonable capex reserve is an additional 5-8% of gross rent on top of your maintenance reserve.
Yes that means you might be reserving 15-18% of gross rent between maintenance and capex. That feels like a lot until the day you need a $12,000 roof and you have the money sitting there waiting. That is the difference between a setback and a crisis.
Beyond vacancy, maintenance, and capex there are several other expenses that eat into cash flow. Landlord insurance is typically 15-25% more than a standard homeowner policy. Property taxes can and do increase, sometimes significantly after a purchase triggers a reassessment. Lawn care, snow removal, and pest control may be your responsibility depending on the lease.
If you are not self managing, property management fees run 8-10% of gross rent plus a leasing fee of 50-100% of one month's rent for placing a new tenant. Even if you are self managing today, you should run your numbers with management fees included so the property still works if your situation changes and you need to hand it off.
Add all of these up and a property that looked like it cash flowed $400 a month on a napkin might actually cash flow $100 or even go negative. The investors who succeed long term are the ones who ran the real numbers before they bought, not after.