How to Calculate Cash Flow on a Vacation Rental

By Constance Beebe, former hotel general manager with more than 20 years in hospitality

A strong summer can make any vacation rental look profitable. Cash flow tells the truer story: what is left after a full year of income pays every expense and the mortgage. Here is how to calculate cash flow on a vacation rental, step by step, so you know whether the property truly supports itself.

From my experience

I was the Front Office Manager at the Best Western King Charles in Charleston when Hurricane Hugo hit in 1989, and my team and I rode it out together. Storms, slow seasons, and quiet months are part of hospitality, and they’re part of owning a vacation rental too. Planning for the whole year, not just the best months, is what carries a property through.

The rental property cash flow formula

Rental income − operating expenses = net operating income (NOI)
NOI − mortgage payments = cash flow

5 steps to calculate vacation rental cash flow

Total a full year of rental income. Use twelve months, slow seasons included. Start with gross rent before management fees, and leave out lodging taxes your manager collects for the government.
Add up your operating expenses. Include management commission, cleaning and turnover, utilities, HOA or resort fees, insurance, property taxes, supplies, and repairs. Our guide to the real cost of owning a vacation rental lists ten to plan for.
Find your net operating income. Subtract operating expenses from income. NOI shows how the property performs before financing.
Subtract your mortgage payments. Use the full year of principal and interest. What remains is your annual cash flow.
Set aside reserves. Move part of your cash flow into savings for slow months and big items like a roof or HVAC system, then check the result month by month.

A simple example

These round numbers are made up to show the math:

A full year of gross rental income: $48,000
Operating expenses for the year: $26,000
Net operating income: $48,000 − $26,000 = $22,000
Mortgage payments for the year: $18,000
Annual cash flow: $22,000 − $18,000 = $4,000, or about $333 a month

Now picture that same home with a $1,500 repair, a lighter fall season, and a week of owner stays. That is why reserves and a month-by-month view matter.

Why monthly cash flow matters for vacation rentals

Vacation rental income is seasonal, but many bills are not. HOA dues, insurance, utilities, and the mortgage arrive every month whether the home is booked or not. Looking at cash flow month by month shows which months carry the year and how much cushion you need to get through the quiet ones.

Cash-on-cash return

Once you know your annual cash flow, you can compare it with the cash you put into the property, such as your down payment and closing costs. Annual cash flow divided by cash invested is called cash-on-cash return. It helps you compare one property with another, or with other places your money could go.

Questions owners ask

What is good cash flow for a vacation rental?

There is no single number. Positive cash flow after setting aside reserves is the first goal. Beyond that, compare your results with your own goals and with what your money could earn elsewhere.

Is the mortgage an operating expense?

No. Net operating income is figured before the mortgage. You subtract mortgage payments afterward to find cash flow.

Is mortgage principal a tax-deductible expense?

No. Principal counts as money going out when you figure cash flow, but it is not deductible. Mortgage interest is treated differently, so confirm the details with your tax professional.

The Rental Property Finances app gives you a five-year cash-flow forecast from your own rent, vacancy, expense, and mortgage assumptions, and your recorded transactions show how each month is actually going.

See the Rental Property Finances app

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About the author

Constance Beebe spent more than 20 years in hotel operations. She started as a night auditor and worked her way up to executive housekeeper, front office manager, assistant general manager, and general manager, later managing 4- and 5-star hotels. She was Front Office Manager at the Best Western King Charles in Charleston during Hurricane Hugo, and a London newspaper wrote about her team. She never asked her staff to do anything she wasn’t willing to do herself, from cooking when cooks didn’t show up to cleaning rooms when housekeeping was short.

This article is general information, not tax, legal, or financial advice. Rules vary by location and situation, so confirm your own treatment with a qualified tax professional.