Cash flow is the money a rental property leaves in your pocket after you allow for vacancy and pay every bill: operating expenses, reserves for repairs and the loan payment. It is usually quoted per month or per year, and before income taxes.
Cash flow = net operating income minus debt service
Say a house rents for $2,000 a month. Allow 5% for vacancy ($100) and you collect $1,900. Operating expenses run $700: $250 for property taxes, $100 for insurance, $150 for management, and $200 set aside for repairs and big replacements. That leaves $1,200 of net operating income. Subtract a $950 principal and interest payment and cash flow is $250 a month, or $3,000 a year. If you put $50,000 into the deal, that is a 6% cash-on-cash return.
Some investors and lenders leave replacement reserves out of NOI and subtract them afterward. Cash flow is the same either way.
A common mistake is counting only the mortgage, taxes and insurance. Here that gives $2,000 minus $950 minus $350 = $700, nearly three times the real figure. It skips vacancy, management and the repair reserve. Vacancy and a new roof do not arrive as monthly bills, but they do arrive. Leave them out and a property that looks profitable on paper can lose money.