Mortgage

A mortgage is a loan secured by real property, repaid over a set term with interest. Its annual payments are the debt service subtracted from net operating income to get cash flow, so the mortgage's size, rate and term set most of the gap between a property's cap rate and an investor's cash on cash return.

On the default deal a $187,500 loan at 7.25% over 30 years costs $1,279 a month, $15,349 a year. That single line turns $20,105 of NOI into $4,756 of cash flow. At 5% the same loan costs $12,078 and cash flow is $8,026; the return goes from 6.3% to 10.7%.

Term matters too. A 15-year loan has a much higher payment and can push cash flow negative even when the property is sound. An interest-only period removes principal from the payment and raises the return until it resets. Investment property mortgages typically require 20 to 25% down and carry rates above owner-occupied loans, and DSCR loans qualify on the property's rent rather than the borrower's income.

Further reading: Mortgage on Wikipedia.