Cap Rate vs. Cash-on-Cash Return

What each one actually measures

• Cap Rate = Net Operating Income ÷ Purchase Price. It answers: "how does this property perform on its own, regardless of how anyone finances it?" Two buyers paying the same price for the same property get the same Cap Rate, whether one pays cash and the other puts 10% down.
• Cash-on-Cash Return = Annual Cash Flow ÷ Total Cash Invested. It answers: "given how I'm actually financing this deal, what return am I getting on the cash I put in?" It includes the mortgage payment as an expense, so it moves with financing terms.

Side by side, same property

A $220,000 rental with $18,000/year in Net Operating Income has a Cap Rate of about 8.2% —fixed, regardless of financing. Now compare two buyers:

• Buyer A pays all cash: Cash-on-Cash Return converges toward the same 8.2%, since the full purchase price is also the cash invested.
• Buyer B puts 20% down ($44,000) and finances the rest: Cash-on-Cash Return depends entirely on the loan terms — a low-rate loan can push it well above 8.2%; a high-rate loan can push it below.

Same property, same Cap Rate, two very different Cash-on-Cash Returns. Neither number is "more correct" — they're answering different questions.

When to use which

Use Cap Rate to compare properties against each other, independent of how you'd finance each one — useful when screening several listings or comparing a property against typical yields in that market (see the guide on what's a good Cap Rate).

Use Cash-on-Cash Return to answer the more personal question: given the actual cash you have and the actual financing available to you, is this specific deal worth doing? It's the more relevant number once you're comparing real financing offers, not just screening properties.

Use both, not one or the other

A property with a strong Cap Rate but weak Cash-on-Cash Return usually means the financing terms (or down payment size) are working against the deal, not the property itself — worth re-running with different loan terms before passing. A property with a weak Cap Rate but strong Cash-on-Cash Return via heavy leverage carries more financing risk if rates rise or a vacancy hits. Run both numbers on the Rental Property Calculator before deciding.