The main categories
Operating expenses that belong in your cash flow calculation: property management fees (typically 8–10% of gross rents), property taxes, landlord insurance, repairs and maintenance, utilities you pay, HOA dues, advertising and leasing fees, and any required licenses or inspections.
Don't skip vacancy and CapEx reserves
Two expenses investors routinely omit: a vacancy allowance (typically 5–10% of gross rents) for time the unit sits empty between tenants, and a capital expenditure (CapEx) reserve (typically 5–10% of gross rents) set aside for future large-ticket replacements such as roofs, HVAC, and water heaters. Skipping them produces a return that only exists on paper.
Mortgage payment vs. operating expenses
Include the full mortgage payment (principal + interest) when calculating cash flow. For cap-rate purposes, though, use net operating income, which excludes debt service. Depreciation is a non-cash deduction — it affects your tax return but is not a cash expense in the cash-flow calculation.
Frequently asked questions
Should the mortgage payment be in operating expenses?
Yes, for cash-flow calculations. For cap-rate calculations use NOI, which excludes debt service.
What percentage should I budget for CapEx reserves?
5–10% of gross rents is a common starting point; older properties and those with aging systems warrant the higher end.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.