Cash Flow

Cash flow is the money left after all expenses and debt payments over a period. For a rental it is net operating income minus debt service. Cap rate stops at NOI and ignores the mortgage; cash flow is what remains after it, so two buyers at the same cap rate can have very different cash flow.

On a $500,000 property with $30,000 of NOI, a cash buyer's cash flow is the full $30,000. A buyer with a $375,000 loan at 7.25% pays about $30,698 a year in debt service and has slightly negative cash flow. Same property, same 6% cap rate, opposite outcomes.

The gap is set by the cap rate versus the mortgage constant. When the cap rate is higher than the loan's annual cost, cash flow is positive at any leverage. When it is lower, cash flow turns negative as leverage rises. Cap rate tells you what the property earns. Cash flow tells you what you keep, and it is the figure that decides whether you can hold the property through a vacancy.

Further reading: Cash Flow on Wikipedia.