Free Cash Flow

Free cash flow is operating cash flow less capital expenditure, the cash a business could return to its owners or lenders. For a rental, a close equivalent is NOI less actual capital spending. Take debt service out as well and you have the cash that reaches the owner.

The default house earns $28,892 of NOI. With 40% down at 7.25%, the loan costs about $24,558 a year, leaving roughly $4,330 before capital projects. A $12,000 roof in the same year would push that to a loss of about $7,700.

This is why NOI includes a replacement reserve even though no check is written for it. The reserve spreads big capital costs over the years between them, so NOI reflects the property's long-run earnings rather than the luck of a quiet year.