New investors often treat cap rate and cash-on-cash return as interchangeable. They're not — and using the wrong one leads to bad comparisons.
Cap rate: the property's unlevered yield
Cap rate = NOI ÷ purchase price. It ignores your mortgage entirely, which is the point: it lets you compare two properties' earning power head-to-head regardless of how each is financed. Think of it as the "all-cash" return. It's the right lens for ranking markets and properties.
Cash-on-cash: your actual return as a borrower
Cash-on-cash = annual pre-tax cash flow ÷ cash invested. Because most investors use leverage, this reflects what you personally earn on the dollars you put in. A 6% cap-rate property can deliver a 12%+ cash-on-cash return with the right financing — leverage amplifies the return (and the risk).
When to use which
- Comparing deals or markets? Cap rate — it's financing-neutral.
- Deciding how to deploy your capital? Cash-on-cash — it reflects your real return.
- Checking if a deal is financeable? Neither — that's DSCR.
The catch with cash-on-cash
Cash-on-cash is sensitive to leverage assumptions. Put less down and the percentage rises — but so does your mortgage payment and your risk if rents soften. Always view it alongside the absolute monthly cash flow and a DSCR check.
Track both on every listing automatically with a free CashFlowRE account.