A cash cow is a property that produces positive cash flow money into your pocket each month. An alligator is a property with a high negative cash flow. Negative cash flow means you must take money out of your own pocket each month to cover expenses. (It’s called an alligator because it “bites” you each month.) This usually occurs when the price of the property is out of whack with the rental income. This happens when prices appreciate far
more rapidly than do rental rates, as has occurred in many markets in recent years. Here’s an example. {Note: PITI stands for principal, interest, taxes, and insurance.)                                        

Cash Cow versus Alligator

Cash Caw   

Original market price        $200,000

Annual PIT! expenses       -14,000

Annual rental income         ^-15,000                                   

Positive cash flow               $1,000

Alligator

New market price            $400,000

Annual PITI expenses      -26,500

Annual rental income       +18.000

Negative cash flow                    $8,500                
        

Note that this is the same property. However, its value  has doubled and for a new buyer, so have the mortgage costs.
 

Rental rates have also gone up a little, but not enough to cover the new costs. At a price of $200,000, this property is a cash cow. At a price of $400,000, it is an alligator. Thus, to avoid buying an alligator you must not only check that the market price is correct based on comparables, but also that the rental rate is high enough to cover your expenses. This is not a problem if you’re going to flip the property. It’s a big problem if you intend to hold it long term.