If you’re choosing your next deal, you’ll run into cap rate vs cash on cash almost immediately. Both help you judge returns—but they answer different questions. This guide gives you fast definitions, a side-by-side, and seven worked examples so you can apply the right metric at the right time.
cap rate vs cash on cash: quick definitions
Cap rate estimates an asset’s return assuming an all-cash purchase. It ignores financing and focuses on the property’s own income stream. Cash-on-cash return measures the return on the dollars you actually invested after financing. If you want to know what the building earns on its own, use cap rate. If you want to know what your down payment is earning after debt service, use cash-on-cash.
Formulas
Cap Rate = NOI / Purchase Price
NOI = Gross Income − Operating Expenses (excludes debt service & capex)
Cash-on-Cash = Annual Pre-Tax Cash Flow / Total Cash Invested
Annual Pre-Tax Cash Flow = NOI − Debt Service (P&I)
How the metrics differ (at a glance)
Before looking at numbers, anchor the comparison. This table keeps cap rate vs cash on cash straight when you’re scanning deals.
| Aspect | Cap Rate | Cash-on-Cash Return |
|---|---|---|
| What it answers | How strong is the asset’s income by itself? | What is my return on the cash I put in, after debt? |
| Includes financing? | No | Yes |
| Useful for | Comparing similar assets, pricing, market comps | Personal yield, leverage plans, JV/LP updates |
| Sensitivity | NOI only | NOI + rates + LTV + amortization |
| Weakness | Ignores debt, capex, taxes | Can look great with risky leverage |
When to use cap rate vs cash on cash
Use cap rate to compare properties across a market or submarket—especially when financing varies by buyer. Use cash-on-cash when you’re evaluating your personal return under a specific loan structure. In short: underwriting starts with NOI and cap rate; investment decisions close with cash-on-cash.
7 real examples: cap rate vs cash on cash in action
Assumptions where not stated: 30-year amortization; we’ll round payments for readability. Actual numbers vary by taxes, insurance, and lender fees, but these examples illustrate how the two metrics behave.
Example 1 — Solid cap, thin leverage
- Purchase price: $250,000; Down: 20% ($50,000); Loan: $200,000 @ 6.5% (≈$1,264/mo; $15,168/yr)
- Gross rent: $2,300/mo; Expenses (tax/ins/maint/mgmt): $7,400/yr → NOI = $20,200 − $7,400 = $12,800/yr
- Cap rate = $12,800 / $250,000 = 5.1%
- Pre-tax cash flow = $12,800 − $15,168 = −$2,368 → Cash-on-cash = −$2,368 / $50,000 = −4.7%
Takeaway: a decent cap doesn’t guarantee positive cash-on-cash if the loan is expensive. Here, cap rate looks okay, but leverage turns the deal negative.
Example 2 — Lower cap, strong leverage
- Purchase: $400,000; Down: 25% ($100,000); Loan: $300,000 @ 5.8% (≈$1,757/mo; $21,084/yr)
- NOI: $26,000/yr
- Cap rate = 6.5% | Cash-on-cash = ($26,000 − $21,084) / $100,000 = 4.9%
Takeaway: lower cap than Example 1, but positive and acceptable cash-on-cash thanks to better rate and higher down payment.
Example 3 — Value-add (post-reno lease-up)
- Purchase: $320,000; Reno: $30,000; All-in basis: $350,000
- Stabilized gross: $3,600/mo; Expenses: $12,000/yr → NOI = $31,200/yr
- Cap rate on cost = $31,200 / $350,000 = 8.9%
- Finance 75% LTV on stabilized value $390,000 → Loan ≈ $292,500 @ 6.2% (≈$1,796/mo; $21,552/yr)
- Cash invested: $350,000 − $292,500 = $57,500 → Cash flow = $31,200 − $21,552 = $9,648
- Cash-on-cash = $9,648 / $57,500 = 16.8%
Takeaway: renovation elevated both metrics. This is where cap rate vs cash on cash alignment makes the deal easy to green-light.
Example 4 — High cap, hidden expenses
- As-is cap looks like 9%—but roof/HVAC deferred, insurance rising
- After realistic expenses, NOI falls 12% → new cap ≈ 7.9%
- Debt service unchanged → cash-on-cash drops more than the cap does
Takeaway: always rebuild NOI from bottoms-up. Padded OM numbers inflate cap rate and make cash-on-cash look rosier than reality.
Example 5 — Short-term rental sensitivity
- NOI swings with seasonality and cleaning/OTA fees
- Cap rate averages 7–8% across the year, but two weak quarters crush cash-on-cash if debt service is fixed
Takeaway: model monthly variability, not annual averages, before you trust either metric.
Example 6 — Low cap, land-bank play
- Cap rate: 4.2% in a core submarket with long tenant
- Cash-on-cash: 0–2% with conservative leverage
Takeaway: thin income is acceptable if the thesis is appreciation, 1031 positioning, or development rights—not yield today.
Example 7 — Refinance boost
- After NOI growth and rate drop, refi lowers annual debt service by $4,000
- Cap rate (on current value) stays similar, but cash-on-cash jumps due to cheaper debt
Takeaway: cap rate is about income/value; cash-on-cash is your financing story. A refi can transform the latter without moving the former much.
Common mistakes with cap rate vs cash on cash
- Using Pro-Forma NOI as if it were actuals. Verify rent rolls, taxes, insurance, utilities, maintenance, management, vacancy, reserves.
- Ignoring capital expenditures. Cap rate excludes capex by definition, but your cash flow won’t. Budget roof, HVAC, parking, and unit turns.
- Comparing cap rates across mismatched asset classes. A 7% for a C-class 1970s walk-up is not the same risk as a 7% for a newer B-class property.
- Letting high leverage “manufacture” cash-on-cash. Great on paper, fragile in reality. Shock test rents, rates, and vacancy.
- Forgetting taxes. Cap rate is pre-tax. CoC is pre-tax too, but your after-tax return can diverge (depreciation helps; tax rules vary).
Due-diligence checklist (copy/paste)
- Rebuild T-12: rent roll, concessions, delinquencies, actual expenses (not estimates)
- Insurance quotes + tax reassessment scenario
- Debt terms: rate, amortization, IO period, prepay penalties, DSCR covenants
- Capex plan (first 24 months) and reserves
- Sensitivity: ±5–10% rent, ±1–2% vacancy, ±100–200 bps rate
FAQ
Which metric wins in cap rate vs cash on cash? Neither “wins.” Use cap rate to price and compare properties; use cash-on-cash to judge your personal yield under a specific loan.
What’s a “good” number? It’s market- and risk-dependent. Many investors target cap rates that beat financing costs and CoC that clears their hurdle (e.g., 8–12%+), but context matters.
Should I model taxes and depreciation? Yes, but keep pre-tax metrics separate for comparability. Use a simple after-tax view for your decision.
Related reads on Bulktrends
- Real Estate Investing for Beginners: 12 Steps to Your First Deal
- Flipping vs Rentals: 9 Key Differences
- DSCR Loans: Requirements, Rates & Examples
- 1031 Exchange Rules: 45/180-Day Timelines
Authoritative sources (for data & definitions)
- FHFA — House Price Index
- Freddie Mac — Primary Mortgage Market Survey
- IRS — Publication 527 (Residential Rental Property)
- HUD — Housing Counseling
- U.S. Census — American Community Survey
Educational content, not financial or tax advice. Returns vary by market, financing, and your risk tolerance. Talk to a qualified advisor for personalized guidance.
