Cap Rate vs Cash-on-Cash Return

Cap rate: the property's unlevered yield

Capitalization rate is net operating income (NOI) ÷ purchase price. Crucially, it ignores financing — it's the return you'd get if you paid all cash. That makes cap rate a clean way to compare propertiesagainst each other and against the local market, because it strips out the distortions of each buyer's particular loan.

A 7% cap rate means the property generates 7% of its price in net income each year before debt. Higher cap rates generally mean cheaper price relative to income (and often higher risk or lower-growth markets); lower cap rates mean the opposite.

Cash-on-cash: your actual leveraged return

Cash-on-cash return is annual pre-tax cash flow ÷ the actual cash you invested (down payment + closing costs + rehab). Because it accounts for your mortgage and your real out-of-pocket, it reflects what you personally earn on the money you put in. Two investors buying the same building at the same price can have very different cash-on-cash returns depending on their down payment and interest rate.

A quick example

Buy a $250,000 property with $1,800/month rent and a 7% cap rate. Pay all cash and your return is roughly that 7% cap rate. Put 25% down on a mortgage and your cash-on-cash return could be higher (if the loan's cost is below the cap rate — positive leverage) or lower (if rates are high — negative leverage). Same property, different answer, because leverage cuts both ways.

So which should you use?

Use cap rate to compare and screen deals and to sanity-check price against the market. Use cash-on-cash to decide whether a specific financed deal is worth your capital. And remember neither tells the whole story: appreciation, loan paydown and taxes all matter over a multi-year hold, which is why serious investors also look at the full picture and IRR.

Want both numbers instantly for a property you're looking at? Drop the figures into the free rental calculator and see cap rate, cash-on-cash, DSCR and cash flow side by side.