Cash flow

Cash Flow - A property’s cash flow refers to the difference between actual rental income and all ongoing costs associated with owning and financing the property. It is the key metric that investors use to assess the financial viability of a real estate investment.

Calculation and Influencing Factors

Cash flow is calculated by subtracting all recurring expenses from net rental income. The most important cost items include:

• Debt service: Interest and principal payments for real estate financing. In times of higher interest rates, debt service can represent the largest single item and turn a previously positive cash flow negative.
• Condominium fees or non-pass-through utility costs: For condominiums, monthly fees are payable to the homeowners’ association. The non-pass-through portion-particularly the maintenance reserve and the property manager’s fee-reduces cash flow.
• Maintenance costs: Ongoing repairs and maintenance measures not covered by the reserve fund place an additional burden on cash flow. As a rule of thumb, we recommend budgeting between 7 and 15 euros per square meter per year as a maintenance reserve, depending on the year of construction.
• Tax burden: Rental income is subject to income tax. At the same time, business expenses-including depreciation (AfA), loan interest, and maintenance costs-can significantly reduce the tax burden. Cash flow after taxes is therefore the most meaningful metric.
• Risk of rent loss and vacancy: Periods when the property is unrented or tenants are delinquent reduce revenue. We recommend factoring in a rental loss risk of two to four percent of the annual gross rent in your calculations.

A positive cash flow means that rental income exceeds all operating costs-the property pays for itself and generates a surplus. A negative cash flow requires the owner to contribute additional funds each month. This is often consciously accepted if the tax benefits or the expected appreciation more than offset the monthly contribution in the long term.

Cash Flow Calculation Step by Step - Example: Condominium in Nuremberg-Langwasser (Purchase Price €220,000)

Item	Amount/Year	Note
Annual base rent (gross)	+ €11,400	€9.50/m², 100 m², 12 months
- Risk of rent loss (3%)	- €342	Vacancy, loss of rent
- Non-pass-through maintenance fees	- €1,800	Maintenance reserve, management
- Maintenance reserve for individual units	- €700	€7/m²/year (built in 1975)
= Net rental income (before debt service)	€8,558
- Debt service (€154,000 loan, 3.5%, 2% principal repayment)	- €8,470	Interest + principal repayment
= Cash flow before taxes	+€88/year	Barely positive
+ Tax savings from depreciation + interest (marginal tax rate 35%)	+ €1,820	2% depreciation + interest as business expenses
= Cash flow after taxes	+€1,908/year (+€159/month)

Cash Flow Optimization in Practice

Property owners can improve their property’s cash flow in various ways. On the income side, options include adjusting rent to market rates, reducing vacancy periods through professional leasing services, and tapping into additional revenue streams-such as renting out parking spaces or basement storage units. On the cost side, it’s worth regularly reviewing financing terms: debt restructuring or making extra payments can significantly reduce interest and principal payments. Optimizing non-pass-through utility costs-for example, by switching property management companies or conducting an energy-efficient renovation that reduces the landlord’s share of maintenance fees-also has a direct impact on monthly cash flow.

Practical Tip for Nuremberg and the Metropolitan Region

In the Nuremberg metropolitan region, we observe that purchase prices in central locations-such as the Old Town, St. Johannis, or Erlangen-have risen significantly more than rents. As a result, newly acquired investment properties in these locations often have a negative or only barely positive cash flow. In outlying areas such as Langwasser, Eibach, or Fürth-Stadeln, however, properties with positive cash flow from the very first month can often still be found. We recommend that investors prepare a detailed cash flow projection covering at least ten years before purchasing, taking into account interest rate risk upon the expiration of the fixed-rate period, expected maintenance costs, and potential rent trends. This allows for a realistic assessment of whether a property is economically viable-or whether the monthly subsidy will place a permanent strain on personal liquidity.

Frequently Asked Questions

What is the difference between gross and net cash flow?

Gross cash flow describes the difference between rental income and ongoing operating costs, excluding financing costs. Net cash flow additionally takes debt service (interest and principal payments) into account. For an actual assessment of liquidity, net cash flow after taxes is crucial, as it shows how much money is actually left at the end of the month or needs to be covered.

At what cash flow level is an investment property worthwhile?

A positive cash flow is desirable but not strictly necessary. Many investors consciously accept a moderate negative cash flow of 100 to 200 euros per month if the property is expected to appreciate in value and the tax relief partially offsets the shortfall. The key factor is that the monthly shortfall fits within one’s personal financial situation and remains predictable over the entire holding period.

How does a rent increase affect cash flow?

A rent increase directly improves cash flow on the income side. However, legal requirements must be met-in particular, the cap of 15 percent over a three-year period (in areas with a tight housing market, such as Nuremberg) and alignment with the local rent index. We recommend using the current Nuremberg rent index as a basis and coordinating the rent increase with an expert advisor at an early stage.

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