Cap rate compared with Cash-on-cash return
| Decision point | Cap rate | Cash-on-cash return |
|---|---|---|
| Primary question | What unlevered yield does the property produce? | What current cash yield does my invested cash produce? |
| Numerator | Annual NOI | Annual pre-tax cash flow after debt service |
| Denominator | Price or current value | Down payment plus closing, rehab, and other committed cash |
| Financing included | No | Yes |
| Best use | Property and market comparison | Capital-plan and loan comparison |
How the difference changes a deal
A $240,000 property with $17,760 NOI has a 7.4% cap rate. If financing leaves $6,000 of annual cash flow on $60,000 invested, cash-on-cash return is 10%. The leverage improved current cash yield in this case, but it also added payment and refinance risk.
A practical decision framework
- Use consistent NOI before comparing cap rates.
- Include all acquisition cash before comparing cash-on-cash returns.
- Stress-test rent, expenses, interest rate, and vacancy rather than treating either base-case percentage as guaranteed.
Frequently asked questions
Can cash-on-cash return be higher than cap rate?
Yes. Favorable leverage can increase the yield on invested cash, although it also increases financial risk.
Which metric is better for an all-cash purchase?
They become more similar, but acquisition costs and below-NOI reserves can still make cash-on-cash return differ from cap rate.
Do either metrics include appreciation?
No. Both are primarily one-year operating measures unless you deliberately extend the analysis.
This guide is educational and does not provide investment, lending, tax, legal, or appraisal advice. Verify inputs and requirements for the specific property and jurisdiction.
Compare the strategies on the actual property.
PropLurk connects six underwriting models with one acquisition pipeline.