Cap rate vs cash-on-cash return
Cap rate measures the property. Cash-on-cash measures your position in it. One building has exactly one cap rate and a different cash-on-cash return for every buyer, because every buyer finances it differently.
Side by side
| Cap rate | Cash-on-cash | |
|---|---|---|
| Formula | NOI ÷ property value | Annual pre-tax cash flow ÷ total cash invested |
| Includes | Operating income and expenses only. No debt, no CapEx, no tax. | Debt service and CapEx reserve. Cash actually in and out. |
| Use it for | Comparing properties and pricing against market comps. | Judging what your own down payment is earning. |
Why the difference matters
They answer different questions and they move in opposite directions under leverage. When the cap rate is above your loan rate, borrowing lifts cash-on-cash above the cap rate — positive leverage. When it is below, borrowing drags it down.
The mistake to avoid
Comparing your cash-on-cash to somebody else's cap rate and concluding one deal beats the other. They are not the same measurement and the comparison is empty. Compare cap to cap, cash-on-cash to cash-on-cash.
Worth knowing
- Cap rate is unlevered by definition. Cash-on-cash is levered by definition.
- Cash-on-cash includes the CapEx reserve; cap rate does not.
- Positive leverage means the cap rate exceeds the loan constant. At a 4 cap and a 7% loan, it does not.
- Neither one includes principal paydown or appreciation. Those live in total return.