Yield tells you the income relative to the purchase price. Cash flow tells you what actually hits your bank account each month. They're related but not the same, and confusing them is expensive.
I speak to investors every week who quote a gross yield on a property and treat that as confirmation it "stacks up." It doesn't tell you that. Yield is a ratio. Cash flow is what the property actually costs to hold, after the mortgage, after the management fees, after every real expense the spreadsheet should be capturing.
Here's how to calculate investment property cash flow properly, with a full worked example on a real-world property type.
Cash flow vs yield: what's the difference
Gross yield is calculated as annual rental income divided by the property's purchase price or current value. A property purchased for $480,000 generating $490 per week in rent has a gross yield of approximately 5.3%. That number tells you nothing about what the property costs to hold.
Cash flow is rental income minus every actual cost, including the mortgage repayment. That includes interest, principal (if you're on a principal-and-interest loan), property management fees, council rates, water rates, insurance, maintenance, and any strata levies. Cash flow is the number that tells you whether money is leaving your account or arriving in it each month.
The critical distinction: a property with a 5.3% gross yield purchased with a 6.0% interest rate loan is negatively geared. The income from the asset does not cover the cost of the debt used to hold it, before you've even counted management fees, insurance, or rates. You are out of pocket every month. That is a cash flow negative position.
The question "is this property cash flow positive?" cannot be answered by looking at yield alone. The answer requires knowing your deposit, your loan amount, your interest rate, and every holding cost that attaches to that specific property.
The two types of cash flow investors talk about
When you're analysing an investment property, there are two figures that matter, and they're often conflated.
Pre-tax cash flow is rental income minus all costs including both the interest component and the principal component of your mortgage repayment. This is the raw number before any tax adjustment. It shows you the actual movement of money in and out of your account each month.
After-tax cash flow is pre-tax cash flow adjusted for the annual tax saving generated by negative gearing. When a property is negatively geared, you record a net rental loss at tax time. That loss reduces your taxable income, which produces a tax refund or reduces your end-of-year tax bill. The after-tax cash flow is your true out-of-pocket cost once that benefit is factored in.
Most conversations about investment property should be about after-tax cash flow. It's what you actually feel. A property that costs $527 per month before tax might cost $36 per month after the tax benefit flows back to you. Those are very different numbers, and they change the entire decision.
before any tax benefit
gearing tax return
How to calculate pre-tax cash flow: step by step
Here's the full calculation sequence I use for every property assessment.
Step 1. Start with annual rental income: weekly rent multiplied by 52.
Step 2. Apply a vacancy allowance. Two weeks of vacancy per year is a reasonable base assumption for a well-located property. Multiply your annual income by 50/52 to arrive at effective rental income.
Step 3. Subtract property management fees. Most property managers in Australia charge between 8% and 8.5% of rent collected, plus a letting fee for new tenancies. Use 8.5% as a conservative base figure.
Step 4. Subtract council rates. These vary by council and property type, but approximately $1,500 per year is a reasonable working figure for a house or unit in a regional or outer-suburban market.
Step 5. Subtract water rates. Budget approximately $700 to $800 per year depending on the state and whether the property is separately metered.
Step 6. Subtract landlord insurance. This covers loss of rent, tenant damage, and public liability. Budget approximately $1,100 to $1,200 per year.
Step 7. Subtract a maintenance allowance. A figure of 0.5% to 1% of property value per year is standard. Use 0.5% for a newer property; 1% for something older or with more moving parts.
Step 8. Subtract strata levies if the property is a unit or townhouse in a strata scheme. These can range from $2,000 to $6,000 per year depending on the building's facilities and maintenance fund.
The sum of Steps 1 to 8 gives you net rental income before loan costs.
Step 9. Subtract annual mortgage interest. Loan balance multiplied by the interest rate. For an interest-only loan, this is your entire loan cost. For a P&I loan, add the principal repayment separately in Step 10.
Step 10. If you're on a principal-and-interest loan, subtract the principal repayment component. Note that the principal repayment is not a tax deduction, unlike interest. It's equity building, not an expense, but it is a real cash outflow.
Step 11. The result is your pre-tax cash flow. A positive number means the property pays you before tax. A negative number means you're out of pocket before tax.
Full worked example: $480,000 Adelaide property
Here are the assumptions: $480,000 purchase price, 20% deposit of $96,000, loan of $384,000 at 6.0% interest rate on interest-only terms, and a weekly rent of $490 (5.3% gross yield). This is representative of a well-located, investment-grade property in Adelaide's middle ring at current market conditions.
| Item | Annual | Monthly |
|---|---|---|
| Gross rental income ($490 x 52) | $25,480 | $2,123 |
| Less vacancy 2 weeks (x 50/52) | $24,500 | $2,042 |
| Less property management 8.5% | -$2,083 | -$174 |
| Less council rates | -$1,500 | -$125 |
| Less water rates | -$700 | -$58 |
| Less landlord insurance | -$1,100 | -$92 |
| Less maintenance 0.5% of $480K | -$2,400 | -$200 |
| Net rental income before loan costs | $16,717 | $1,393 |
| Less mortgage interest ($384K x 6.0%) | -$23,040 | -$1,920 |
| Pre-tax cash flow | -$6,323 | -$527 |
On the raw numbers, before any tax adjustment, this property costs $527 per month to hold. That's the number most people stop at, and it's the wrong place to stop.
After-tax cash flow: the number that actually matters
Negative gearing means the property is producing a tax-deductible loss. To find your true out-of-pocket cost, you need to calculate the annual tax saving that loss generates and add it back to your pre-tax figure.
The deductions that flow through to your tax return are not limited to cash costs. For a new build or near-new property, depreciation is a significant non-cash deduction. Under Division 40 (plant and equipment) and Division 43 (capital works), a $480,000 new build property can generate approximately $9,600 per year in depreciation deductions in the early years of ownership.
Here's the full deduction schedule for this property:
| Deductible item | Annual amount |
|---|---|
| Mortgage interest | $23,040 |
| Property management fees | $2,083 |
| Council rates | $1,500 |
| Water rates | $700 |
| Landlord insurance | $1,100 |
| Maintenance allowance | $2,400 |
| Depreciation (Div 40 + 43 estimate) | $9,600 |
| Total annual deductions | $40,423 |
| Less rental income received | -$24,500 |
| Net rental loss (tax deduction) | $15,923 |
At a 37% marginal tax rate, a $15,923 net rental loss generates a tax saving of $5,891 per year, or $491 per month. That saving flows back to you either as a reduced tax bill or as a refund at the end of the financial year.
After-tax cash flow: -$527/month + $491/month = -$36/month effective out-of-pocket cost.
A $480,000 investment property in one of Australia's strongest-performing markets costs $36 per month after the tax benefit. That is what the property actually costs you. The gross yield figure told you nothing useful on its own.
Note that the depreciation figure depends on the age, type, and construction of the property. A qualified quantity surveyor produces a depreciation schedule, and the cost is itself tax-deductible. For older properties with no depreciable plant and equipment, the depreciation benefit is significantly lower.
What "cash flow neutral" actually means
Cash flow neutral means after-tax cash flow of approximately zero. The property costs you nothing to hold each month, and all capital growth and equity accumulation is effectively free of any ongoing cash commitment from you.
This is a meaningful threshold. At zero net cost, you are holding a growth asset with no ongoing drain on your income. Every dollar of capital growth is pure upside.
At current interest rates and yields, reaching cash flow neutral after tax generally requires a gross yield of approximately 5.5% to 6%, depending on four variables: your marginal tax rate, your interest rate, whether you have a depreciation schedule, and your deposit size (which determines the loan-to-value ratio and therefore the interest bill).
Positive cash flow means the property generates more income than it costs to hold, after all costs including the mortgage, before or after tax depending on which measure you're using. Genuinely positive cash flow properties in metro markets are rare at current rates. In high-yield regional or outer-suburban markets, particularly in Queensland and South Australia, it's more achievable, but the trade-off is often lower growth fundamentals.
The right balance depends on your strategy, income, and holding capacity. I work with investors across both ends of that spectrum.
What changes your cash flow position most
Once you understand the structure of the calculation, it becomes clear which levers move the numbers most.
Interest rate. Every 0.5% change in rate on a $400,000 loan changes your annual interest bill by $2,000. On a $600,000 loan, that's $3,000. Rate movements are the single largest swing factor for most investors.
Deposit size. A larger deposit means a smaller loan, which means lower interest costs. Going from 10% to 20% deposit on a $480,000 property removes $48,000 from the loan balance and saves $2,880 per year in interest at 6.0%.
Rental yield. A 0.5% higher yield on a $480,000 property generates an extra $2,400 per year in gross income. Selecting a market or property type with strong yield fundamentals has a direct and immediate impact on cash flow.
Depreciation. The difference between owning a new build with a full depreciation schedule versus an older property with no depreciable items can swing after-tax cash flow by $3,000 to $5,000 per year at a 37% tax rate. New builds and substantially renovated properties produce the best depreciation outcomes.
Your marginal tax rate. The higher your income, the more valuable a rental loss is. At the 37% rate ($135,001 to $190,000 threshold), a $15,923 loss saves $5,891. At 32.5% ($45,001 to $135,000), the same loss saves $5,175. The difference across a hold period compounds meaningfully.
Cash flow over time
A property that costs $527 per month to hold in year one does not cost $527 per month in year five. Cash flow improves over time, and the trajectory matters as much as the starting position.
Rents in Australian investment-grade markets have grown at approximately 3% to 5% per year over the long run, and faster in tight rental markets. On the example above, a 4% annual rent increase means:
- Year 1: $490/week rent, -$527/month pre-tax
- Year 3: approximately $530/week rent, pre-tax cash flow gap narrows to around $350/month
- Year 5: approximately $570/week rent, pre-tax cash flow gap narrows to around $150 to $200/month
- Year 8 to 10: on an interest-only loan with stable rates and continued rental growth, many properties that started at a meaningful pre-tax shortfall move to neutral or slight positive before tax
Meanwhile, if the property is on a principal-and-interest loan, the loan balance is declining, which means the interest bill is also declining year by year. Both forces drive cash flow improvement over a hold period.
The point is that negative cash flow on entry does not mean negative cash flow permanently. Time and rent growth do most of the work, and the after-tax position makes the early years far more manageable than the headline number suggests.
These calculations are examples only. Your actual cash flow depends on your specific loan terms, tax situation, and property. Work with a mortgage broker who understands investment lending and an accountant who understands property investment before finalising your numbers. The depreciation figures in particular should be confirmed by a qualified quantity surveyor, not estimated.
Disclaimer: This article is general information only and not financial or tax advice. Speak to a qualified accountant or mortgage broker before making investment decisions.
Sources:
ATO rental property expenses you can claim: ato.gov.au: Rental expenses you can claim
ATO negative gearing: ato.gov.au: Negative gearing
RBA cash rate and monetary policy: rba.gov.au: Cash rate decisions
ATO capital works deductions (depreciation): ato.gov.au: Capital works deductions
