How to Calculate the After-Tax Cash Flow from Operations of Your Vacation Rental Property

Purchasing a rental property is both appealing and seemingly daunting.

In fact, looking at the after-tax cash flow is a critical component of evaluating real estate properties.

Without understanding the calculations associated with an income-generating vacation rental property, you are just guessing whether it is an excellent investment.

Therefore, it is necessary to explain how to calculate the after-tax cash flow from operations for those who are new to investing in real estate vacation properties.

What Is After-Tax Cash Flow in Real Estate?

It is the difference between the property income and expenses, including debts and taxes.

Cash flow is the ultimate goal of investing in vacation rental properties and a true chance at accomplishing your goal of financial independence.

If you are not familiar with the concept, cash flow is the cash income that you make passively each month from rental real estates such as a commercial building, single-family rental, or multi-family apartment complex.

How cash flow works

You can start generating cash flow after purchasing your investment and hold on to it for some time.Furthermore, the real estate investment generates income either weekly, monthly, quarterly, or annually. Simply put, cash-flow investing means that your goal is to not sell the property, because you want to keep collecting a regular income on rent.

The benefits

One of the best things about cash flow is that you don’t have to save up dollars to achieve financial freedom. That is because a positive cash flow leads to more cash flow.


  • There comes a point in your journey where cash flow supports your living expenses and your additional investments
  • Cash flow means freedom to live a life of leisure or grow your real estate portfolio
  • It helps eliminate the fear of running out of money when you finally retire—as long as you own the property, cash is coming in like clockwork
  • You can start making money as soon as you secure your first tenant

Assessing a property’s operating cash flow and the impact taxes have on it is an important skill in evaluating the investment’s overall health.

So, read on to find out how to calculate taxes on the income statement you receive from the property seller.

How taxes on rental income work

Real estate owners should know their federal tax responsibilities. The law requires that you report on your tax return any rental income you accrue after deducting associated expenses.

Use records to monitor the rental property’s operations and identify the source of receipts, track deductible expenses, and in preparing tax returns. The seller should provide outstanding records concerning rental activities, including rental income and expenses; it is from these records that you can deduce the after-tax cash flow.

When looking at investment opportunities, calculating the after-tax cash flow figure will help determine whether there is more money coming in than expenses. The foundation for acquiring vacation rental assets that work for you is learning how to calculate the after-tax cash flow from operations.

How to Calculate Cash Flow After Tax

Essentially, use the following formula:

After-tax cash flow = Total property income minus Total expenses (including debts and taxes)

The calculation looks deceptively simple, but more goes into predicting the income and expenses for vacation rental homes.

Step 1: Get gross income

Calculate how much income the rental property can generate in a year.

Gross income = Gross potential rent + Additional sources of income – Vacancy rate


Gross potential rent is the monthly income multiplied by 12 months

Additional sources of income include utility reimbursements, pet fees, administrative fees, and parking

The vacancy rate is the period of time when you have no tenants because of moves and pre-rental repairs

Step 2: Your gross expenses

Owning a rental property comes with multiple recurring expenses. Such expenses vary from one property to the next. The most common are:

  • Insurance based on square footage and type of property
  • Management fees standard in your locality
  • Homeowners Association (HOA) and Property Owner Association (POA) fees, which should be factored as annual expenses
  • Maintenance and repairs, which should be about two to five percent of annual rent receivable for tasks like landscaping
  • Seasonal expenses include those for snow removal and preventative updates to the furnace or central air unit
  • Marketing costs are accrued for acquiring new tenants
  • Other potential expenses

Step 3: Get Net Operating Income (NOI)

Estimating the profitability of rental property is relatively simple.

NOI = Gross income minus Gross expenses

The NOI shows how much cash flow is available for paying lenders and equity partners. However, NOI does not provide you with the full picture.

The critical missing component is Capital Expenditures (CapEx). These expenses occur less frequently, such as replacing a major appliance or the roof. Remember to account for other big-budget items like hot water heaters and the HVAC, or you risk spending your entire cash flow on a single major repair.

The best real estate investor is one who puts aside approximately five percent of his/her funds for large and small costs, so they are ready in case the property requires a major repair. It is advisable to prepare and budget for such expenses based on the condition of the property.

Therefore, use the following formula: 

Adjusted NOI = NOI –  CapEx reserve funds

Step 4: Cash flow before taxes

Now that you have the adjusted NOI, subtract money spent on the entire mortgage payment, interest, and principle. Add the loan amount of any money you borrowed to finance capital improvements to the property.

Also, include interest earned from loans or investments made from the property. The resulting number is the Cash Flow Before Taxes (CFBT).

CFBT = Adjusted NOI – Debt service + Loan proceeds + Interest earned

Step 5: Compute after-tax cash flow from operations

So far, you have taken care of operating expenses, capital expenses, the lender, and now it is time to pay income tax before you can figure out what is yours to keep.

To calculate your after-tax cash flow, use the CFBT as the taxable income. Multiply your marginal tax bracket by the CFBT to see if you need to pay additional tax or save money on taxes (tax savings).

If the CFBT is negative, then the amount you are calculating is a tax saving.

After-tax cash flow = CFBT x Tax bracket rate in percentage

If this sounds like too many numbers, then…

Get help with calculating cash flow

If there is a deal you are eyeing, you always have the option of running the numbers for free using this rental cash flow calculator.

The tool provides a built-in mortgage calculator in addition to offering a total annual debt service, monthly and annual cash flow, cash-on-cash returns, and cap rates. You can also build potential vacancies into your overall projection of a property’s expected gross income.

How Much Cash Flow Should You Have from Your Vacation Rental?

Generating good cash flow is subjective. However, every real estate investor should always look for properties that provide a positive cash flow.

Rating cash flow depends on:

  • Rental property type—Multi-family units have a high cash flow compared to single-family rental properties. Further, expensive properties and those with amenities and renovations also have a high cash flow (hence rental income).
  • Location—Interest rates, association fees, property taxes, and other primary expenses depend on the location of the property. The economy and legislation of the neighborhood may impact cash flow.
  • Your investment strategy—An Airbnb rental yields a high cash flow value compared to the traditional rental strategy.
  • Financing—The financing option you choose also plays a significant role in cash flow analysis.

As you can see, it’s difficult to quantify what makes for a good cash flow property when you take into consideration only income  projection. The solution is to express the figure as a percentage.

You can do this using:

Cash-on-cash return = (Total rental income in a year – Expenses and costs) / Cash invested by 100%


Cash-zone = (Gross rental income in a year / by Property price) x 100%

In terms of cash-zone, a good cash flow rental property should offer over 8 percent return on investment.

In Summary

Learning how to calculate after-tax cash flow from operations is critical in making a wise real estate investment decision. After all, the reason you are interested in rental properties is most likely for the cash flow they generate as they appreciate.

Do not make costly errors by neglecting research and due diligence. Instead, use an accurate, easy-to-use calculator to automatically understand all the components that go into calculating a cash flow that works for you. Once you do, you’ll not only know more about real estate investing but will be empowered to prepare ahead and make wiser decisions!