Net Lease Cash Flow — From Rent Check to Pocket

Cap rates describe the property; cash flow describes your deal. The waterfall from rent check to pocket, with the numbers a typical $1.5M NNN purchase produces at each step.

Rent to NOI

On absolute-net paper the trip is short: contract rent minus near-zero landlord expenses ≈ NOI. Say $97,500 on a 6.5% cap at $1.5M. NN structures subtract reserves here — the honesty adjustment that separates economic yield from flyer yield.

NOI to cash flow: the leverage fork

All-cash: pocket the NOI, 6.5% cash-on-cash, full stop. Levered at 65% LTV ($975K at, say, 6.75% on 25-year amortization): debt service ≈ $80,800, leaving $16,700 on $525K down — a 3.2% cash-on-cash that looks worse until principal paydown ($18K year one) and the tax layer join the count. Leverage in a tight cap-to-rate spread era is a total-return choice, not an income multiplier — buyers wanting spendable yield today run lower LTV or all cash; buyers building equity ladders borrow.

The tax layer

Depreciation (~$27K annually on a typical allocation) shelters the taxable slice; interest deducts; the paper loss may cage passively for high earners (the rules). Net effect: modest levered cash flow often arrives essentially untaxed for years — the after-tax comparison against bonds is where NNN’s case actually rests.

The compounding everyone underprices

Escalations transform the waterfall over a hold: 10%-per-five bumps take that 6.5% going-in yield to 7.9% on cost by year eleven; 2% annual bumps do it faster and smoother. Two identical caps with different escalation schedules diverge by six figures across a decade — model the whole schedule, never the year-one snapshot.