Cash Flow

Cash flow is the money left after all operating expenses and debt payments over a period. For a rental it is net operating income minus debt service. Annual pre-tax cash flow is the numerator of cash on cash return: divide it by the cash invested and you have the return.

Build it from the top. Rent and other income, minus vacancy, gives collected income. Taxes, insurance, HOA, maintenance, reserves and management come off next, leaving NOI. Subtract twelve months of principal and interest and what remains is cash flow. On the default deal, $20,105 of NOI minus $15,349 of debt service leaves $4,756.

The figure is pre-tax and before depreciation, which is the standard definition. It is also sensitive to what you count as an expense: leaving out management or reserves inflates cash flow and the return with it. Cash flow is the part of a rental's return you can spend, which is why investors rank it ahead of appreciation for deciding whether they can hold a property.

Further reading: Cash Flow on Wikipedia.