Quick answer, as of November 2026
Checked November 2, 2026: NOI is collected rent minus operating costs, before any mortgage. Cash flow subtracts the loan payment and reserves, and cash-on-cash return divides that cash flow by the cash you invested. In our hypothetical $300,000 rental, NOI is $10,746 a year, yet a 7.5 percent loan turns it into a $9,932.76 shortfall.
Gregg Costin, Realtor, The Gregg Costin Team at Dalton Wade
Key takeaways
- NOI leaves out the mortgage, so a property can show positive NOI and still need money from you every month.
- When the loan's annual payment is a larger share of the balance than NOI is of the price, borrowing lowers your cash return.
- Rebuild the tax and insurance lines for an investor: a Florida homestead exemption does not follow the house, and Alabama assesses non-owner-occupied homes in a higher class.
- Taxable rental income is a different number again: principal is not deductible, and depreciation is a deduction that costs no cash.
A rental can earn money on paper and still take money out of your checking account every month. That happens when three different numbers get treated as one: net operating income, cash flow and cash-on-cash return. Each answers a different question, and a pro forma that blurs them can make a weak deal look ready to buy.
Below, one hypothetical Gulf Coast rental runs from rent to cash in hand. The inputs are illustrations, not market data, a rent estimate or a loan quote.
What is the difference between NOI, cash flow and cash-on-cash return?
NOI measures the property, cash flow measures the property with your loan, and cash-on-cash return measures that cash flow against the money you put in. Keeping them apart is the whole point:
- Net operating income (NOI): collected rent minus operating expenses such as taxes, insurance, management and repairs. It ignores the mortgage.
- Cash flow: NOI minus the full loan payment and the money you set aside for big replacements.
- Cash-on-cash return: one year of cash flow divided by the total cash you invested, including the down payment, closing costs and make-ready work.
- Cap rate: NOI divided by the price. It compares properties as if nobody borrowed.
Because NOI leaves out the loan, two buyers of the same house see the same NOI, yet one can have positive cash flow and the other negative. The mortgage makes the difference.
How do you calculate NOI on a rental house?
Start with a full year of scheduled rent, take out an allowance for empty months and unpaid rent, then subtract every operating cost. Assume a single-family house priced at $300,000 that rents for $2,100 a month.
At $2,100 a month, scheduled rent comes to $25,200 a year. A 5 percent allowance for vacancy and unpaid rent takes off $1,260, leaving collected rent of $23,940.
Then the operating expenses, all hypothetical for this house:
- Property tax: $4,800
- Insurance: $3,900
- Management at 10 percent of collected rent: $2,394
- Repairs and maintenance: $1,500
- Lawn, pest control and miscellaneous: $600
Those five lines total $13,194, so NOI is $23,940 minus $13,194, or $10,746 a year.
Leave out the mortgage payment, income taxes and depreciation; they are not operating costs. Replacement reserves for a roof, an air conditioner or a water heater are handled two ways in practice. We keep them below NOI and subtract them from cash flow, so they never drop out.
Divide NOI by the $300,000 price and the cap rate is about 3.6 percent. That is what the property earns before anyone borrows a dollar.
Which expenses do rental pro formas usually get wrong?
Vacancy, reserves and management are the lines most often left out, and tax and insurance are the lines most often copied from a seller whose situation is different from yours:
- Left out entirely: vacancy, reserves and management, which a self-managing owner should still price because a move or a busy year can force a manager in later.
- Copied from the seller: tax and insurance, whose bills describe a different owner.
In Florida, a seller's tax bill may reflect a homestead exemption. The Florida Department of Revenue says an owner who makes a property a permanent residence may be eligible for a homestead exemption that would decrease the property's taxable value by as much as $50,000.
A rental is not the investor's permanent residence, so in Escambia or Santa Rosa County, estimate the tax from the full assessed value without that exemption. Our Escambia and Santa Rosa property tax guide walks through the bill line by line.
Why does the tax line change in Alabama?
Across the state line, the property class itself changes. The Alabama Department of Revenue assesses Class III property, which includes single-family owner occupied residential property, at 10 percent of value, and Class II, all property not otherwise classified, at 20 percent.
A house in Gulf Shores, Orange Beach or Foley that the owner does not live in does not fit the Class III description, so its assessed value, and its tax at the same millage before any exemptions, can be twice what an owner-occupant's would be. Confirm the class with the Baldwin County Revenue Commission before you underwrite.
Insurance needs the same care: a landlord policy is a different product from the seller's homeowners policy. Our Florida home insurance guide and the post on Florida insurance relief in 2026 explain what drives the quote.
How can a mortgage turn positive NOI into negative cash flow?
It happens when the loan payment is larger than the NOI, and in this example it is. Suppose the buyer finances the house this way:
- Down payment: 25 percent of $300,000, or $75,000
- Closing costs: $9,000
- Make-ready work: $3,000
Cash invested is $87,000. The remaining $225,000 loan, at a hypothetical 7.5 percent fixed rate for 30 years, costs $1,573.23 a month in principal and interest, or $18,878.76 a year.
NOI of $10,746 minus $18,878.76 of debt service leaves cash flow of negative $8,132.76. Set aside $1,800 a year for replacements and the owner is short $9,932.76 for the year.
Divide that shortfall by the $87,000 invested and cash-on-cash return is about negative 11.4 percent. The house produces income, and the owner still writes checks.
The reason shows up in one comparison. The loan's annual payment is about 8.4 percent of the loan balance, while the property earns about 3.6 percent on its price. When borrowed money costs more than the property yields, every borrowed dollar lowers your cash return.
The rate here is an assumption, not a quote. Our explainer on what moves mortgage rates shows why yours will differ.
What does the same rental look like in a bad year or with no loan?
The table runs the same house three ways. The downside year doubles vacancy to 10 percent, raises insurance to $4,900 and repairs to $3,000. The all-cash column removes the loan and keeps the same $12,000 of closing and make-ready costs, so the investment is $312,000.
| Line (annual) | Base, financed | Downside, financed | Base, all cash |
|---|---|---|---|
| Scheduled rent | $25,200 | $25,200 | $25,200 |
| Vacancy and unpaid rent | $1,260 | $2,520 | $1,260 |
| Collected rent | $23,940 | $22,680 | $23,940 |
| Operating expenses | $13,194 | $15,568 | $13,194 |
| NOI | $10,746 | $7,112 | $10,746 |
| Debt service | $18,878.76 | $18,878.76 | $0 |
| Replacement reserves | $1,800 | $1,800 | $1,800 |
| Cash flow after reserves | negative $9,932.76 | negative $13,566.76 | $8,946 |
| Cash invested | $87,000 | $87,000 | $312,000 |
| Cash-on-cash return | about negative 11.4% | about negative 15.6% | about 2.9% |
Paying cash makes the cash flow positive, but the return on $312,000 is under 3 percent. Financing magnifies the result in whichever direction the property already points, and here it points down.
What would reverse the answer? On the financed base case, the rent that covers operating costs, the loan and reserves works out to about $3,068 a month, with the same 5 percent vacancy and 10 percent management. At $2,100, the price, the down payment, the rate or the rent assumption has to change before this deal works.
How does a lender count the rent when you apply for the loan?
Your lender uses its own formula, separate from your NOI. For a purchase, Fannie Mae's Selling Guide tells lenders to multiply monthly gross rent by 75% for the net rental income amount, then subtract the full monthly payment of the subject property, including taxes, insurance and any association dues.
In our example, 75 percent of $2,100 is $1,575. Against a payment of $2,298.23 a month, which adds hypothetical monthly tax of $400 and insurance of $325 to principal and interest, the lender's figure is negative $723.23 a month. That shortfall counts against your income when the lender sizes the loan.
Ask your loan officer how your program treats rent before you shop; our mortgage preapproval guide lists what to bring.
Is rental cash flow the same as taxable rental income?
No. The tax return sorts the same payments differently from your bank account, so a rental can lose cash and still show taxable income, or the reverse.
According to IRS Publication 527, the 2025 edition, you can deduct mortgage interest you pay on your rental property, but you can't simply deduct your mortgage or principal payments as an expense. Principal is cash out the door that the return does not treat as an expense.
Depreciation works the other way: no cash leaves, yet the return shows a deduction. Publication 527 lists a 27.5-year recovery period for residential rental property under the general depreciation system, and land is not depreciable. If $240,000 of the hypothetical $300,000 price were the building, a full year of depreciation would be about $8,727. The first year is smaller because of the mid-month convention.
Repairs and improvements also split. The publication says a repair or maintenance expense may generally be deducted, while you must capitalize any expense you pay to improve your rental property. Ask a tax professional how your own numbers fall; this example is not tax advice.
What changes for a short-term vacation rental?
Revenue changes first. Florida sales tax continues to apply to rentals or leases of living, sleeping, or housekeeping accommodations for six months or less, the Department of Revenue confirmed in TIP 25A01-04. Its sales tax page puts the general state rate at 6% and lets counties add local transient rental taxes for terms of six months or less.
That tax is collected from the guest and passed to the state and county, so it is never part of your revenue or NOI. For a vacation rental on Pensacola Beach or in Navarre, underwrite nightly revenue after those taxes, then add costs a long-term lease does not carry:
- Cleaning and laundry between stays
- Booking platform fees
- Furnishings and their replacement
- Utilities, internet and streaming
- Longer empty stretches outside the season
Whether short stays are allowed depends on the address, the zoning and any association rules, so verify them before you count on the income. Pensacola Beach also has its own leasehold structure to understand before you buy there.
What should you check before you trust a rental pro forma?
- Verify scheduled rent from signed leases or current rents for similar homes, not the asking rent.
- Price management and a vacancy allowance, even if you plan to manage it yourself.
- Check the property tax an investor would pay, without the seller's homestead exemption or owner-occupied class.
- Get a landlord insurance quote on the actual address.
- Run NOI, then subtract the full loan payment and a replacement reserve to get cash flow.
- Test cash-on-cash return against every dollar you will invest, a bad year and the break-even rent.
Our rental and mortgage calculators handle the arithmetic, and you can search current listings to test real prices against these steps. If you have a specific property in mind, send us the numbers and we will rebuild them with you before you write an offer.
Sources
Sources checked November 2, 2026. The worked example uses a hypothetical price, rent, expenses and loan rate; it is not a rent estimate, a loan offer or tax advice.
- IRS Publication 527 (2025): deductible interest, nondeductible principal, repairs versus improvements, land and the 27.5-year recovery period.
- Fannie Mae Selling Guide B3-3.8-02: the 75 percent gross rent calculation for a purchase.
- Florida Department of Revenue TIP 25A01-04 and Florida Sales and Use Tax: transient rentals and local transient rental taxes.
- Florida Department of Revenue, exemptions: the homestead exemption.
- Alabama Department of Revenue, property tax assessment: classes and assessment ratios.
Frequently asked questions
Is NOI calculated before or after the mortgage payment?
Before. Net operating income is collected rent minus operating expenses such as property tax, insurance, management, repairs and routine services. It deliberately ignores how the property is financed, which is why it can compare two houses fairly. The mortgage payment comes out next, when you calculate cash flow, and that is the step where many rentals that look healthy on an NOI basis turn negative.
What is a good cash-on-cash return on a rental?
There is no single right number. Compare it with what the same cash could earn elsewhere at a risk you would accept, and with your own reason for owning the property. Some investors accept a low or negative figure because they expect appreciation or plan to pay the loan down. A negative cash-on-cash return means you are adding money every year, so count that cost honestly.
Should replacement reserves come out before or after NOI?
Practices differ, so state which convention you use. Some underwriters deduct reserves inside NOI, and others subtract them after NOI along with the mortgage. In this article reserves sit below NOI and come out of cash flow. The convention matters less than the habit: a roof, an air conditioner and a water heater will need replacing, and the money has to be set aside somewhere.
Does paying down the loan principal count as part of my return?
It builds equity, but it is not cash you can spend, so it is not part of cash flow or cash-on-cash return. The IRS treats it the same way: Publication 527 says you cannot simply deduct mortgage or principal payments as an expense, while mortgage interest is deductible. If you want to count principal paydown, report it as a separate equity figure next to cash flow, not inside it.
How will a lender count the rent when I buy a rental?
For a purchase, Fannie Mae's Selling Guide tells lenders to multiply monthly gross rent by 75 percent and then subtract the property's full monthly payment, including taxes, insurance and any association dues. In this article's example, $2,100 of rent becomes $1,575, and a $2,298.23 payment leaves negative $723.23 a month counted against your income. Your lender's program may have other conditions, so ask early.
Do I collect sales tax on rent in Florida?
For short stays, yes. The Florida Department of Revenue says sales tax under section 212.03 continues to apply to rentals of living, sleeping or housekeeping accommodations for six months or less, and counties may add their own transient rental tax. That money is collected from the guest and passed on to government, so it is never revenue. For a longer lease, confirm the treatment with the Department or a tax professional.
Can I rely on the seller's rent and expense figures?
Use them as a starting point only. Check the rent against the signed leases and current rents for similar homes, pull the tax bill from the county and estimate it without the seller's exemptions, and get a landlord insurance quote on the actual address. Then add vacancy, management and reserves even if the seller's sheet leaves them out. The numbers you verify are the ones you should underwrite.
Put this guide to work
Send the listing, the current lease or rent estimate, the county tax bill and a landlord insurance quote, and we will rebuild the numbers with you before you offer.