Cash Flow

Cash flow is the money that actually reaches the owner in a period. For a rental property it is net operating income less debt service, and sometimes less capital spending that was not reserved for. NOI belongs to the property. Cash flow belongs to the owner and depends on the loan.

Take the default property with a 75% loan. $225,000 at 7.25% over 30 years costs $1,535 a month, $18,420 a year. NOI is $18,270. Cash flow is about negative $150 a year, which means the owner feeds the property $12 a month even though it produces $1,522.50 of NOI every month. With 40% down the payment drops to $1,228 and cash flow turns positive at roughly $3,535.

The Wikipedia cash flow article covers the general accounting idea, but the cap rate article draws the real estate distinction directly: cap rate uses NOI, not cash flow, because financing varies by buyer. Lenders test the relationship with the debt service coverage ratio, NOI divided by annual debt service, which is 0.99 here. Most commercial lenders want 1.20 to 1.25, so this loan would not be approved at this NOI.

Further reading: Cash Flow on Wikipedia.