# Cap Rate vs Cash-on-Cash Return: Which One Answers Your Question

Cap rate measures the property. Cash-on-cash measures your deal. One ignores your mortgage entirely and the other is mostly about it, which is why the same building can look strong on one and weak on the other.

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- **Canonical URL:** https://dothecalculation.com/blog/property/cap-rate-vs-cash-on-cash-return
- **Category:** Real Estate & Property
- **Author:** Do The Calculation Team
- **Published:** 2026-08-03
- **Reading time:** 11 min read
- **Publisher:** Do The Calculation (https://dothecalculation.com)
- **Methodology:** https://dothecalculation.com/methodology

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## Cap Rate vs Cash-on-Cash Return

Both measure return on a rental property and they routinely disagree, because they are not measuring the same thing. Capitalisation rate values the asset as if you paid cash. Cash-on-cash return measures what your own money earned, after the lender took their share.

Neither is more correct. They answer different questions, and using the wrong one is how an investor talks themselves into a property that cannot service its debt, or passes on one that would have worked.

Tool: [Try the cap rate calculator](https://dothecalculation.com/calculators/cap-rate-market-calculator) — Work out cap rate from net operating income and price, or the implied value at a target rate.

## The two formulas

**Cap rate and cash-on-cash**

```
Cap rate = NOI / Property value × 100    ·    Cash-on-cash = Annual pre-tax cash flow / Cash invested × 100
```
- NOI is rental income less operating expenses, before any mortgage payment.
- Cash flow is NOI less the mortgage payment.
- Cash invested is deposit plus closing costs plus any initial repairs.

> **The one difference that matters** — Cap rate deliberately excludes financing. Cash-on-cash deliberately includes it. That is why leverage changes one and not the other.

## What belongs in net operating income

NOI is where most amateur analysis goes wrong, almost always by omission. It includes every recurring operating cost and excludes financing and capital items.

**Inside and outside NOI**
| Include in NOI | Exclude from NOI |
| --- | --- |
| Property taxes | Mortgage principal and interest |
| Insurance | Depreciation |
| Property management fees | Income tax |
| Repairs and maintenance | Capital improvements (a new roof) |
| Vacancy allowance | Your own unpaid labour, though you should price it |
| Utilities you pay, landscaping, HOA dues | Loan origination and refinancing costs |

The three most commonly omitted are vacancy, management, and maintenance reserves. Leaving all three out on a property grossing $30,000 a year typically overstates NOI by $6,000 to $8,000, which moves a 7% cap rate to 5% once corrected.

## The same property, both ways

A duplex at $400,000. Gross rent $42,000 a year. Operating expenses, properly counted, $16,800. NOI is therefore $25,200.

**Cap rate is unaffected by how you pay; cash-on-cash is not**
| Financing | Cash invested | Annual debt service | Cash flow | Cap rate | Cash-on-cash |
| --- | --- | --- | --- | --- | --- |
| All cash | $412,000 | $0 | $25,200 | 6.30% | 6.12% |
| 25% down at 6.5% | $112,000 | $22,752 | $2,448 | 6.30% | 2.19% |
| 25% down at 5.0% | $112,000 | $19,320 | $5,880 | 6.30% | 5.25% |
| 25% down at 7.5% | $112,000 | $25,164 | $36 | 6.30% | 0.03% |

The cap rate is 6.30% in every row, because the building has not changed. Cash-on-cash swings from 6.12% to effectively zero purely on the interest rate. This is the entire point of keeping the two separate: cap rate tells you what you are buying, cash-on-cash tells you what you are getting.

> **Positive leverage, in one sentence** — Borrowing helps only when the cap rate exceeds the mortgage constant. Above it, leverage lifts cash-on-cash above the cap rate. Below it, every extra dollar borrowed makes your return worse.

## When to use which

Use cap rate to compare properties, because it strips out the financing you happened to arrange and leaves the asset. Two buildings in the same submarket with different cap rates are telling you something about condition, tenancy, or risk. It is also how the market prices: an appraiser divides NOI by the prevailing cap rate to reach a value.

Use cash-on-cash to decide whether to do this deal, with this loan, at this price. It is the only one of the two that answers "what will my money earn", and the only one that reveals a property whose numbers work on paper but cannot cover its own mortgage.

**Question to metric**
| Question | Metric |
| --- | --- |
| Is this priced in line with the market? | Cap rate |
| Which of these three properties is the better asset? | Cap rate |
| What will my deposit earn this year? | Cash-on-cash |
| Should I put 20% or 35% down? | Cash-on-cash |
| Will the lender approve it? | Debt service coverage ratio |
| What is the return over the whole hold, including sale? | Internal rate of return |

## What neither one tells you

Both are single-year snapshots. Neither counts principal paydown, which quietly builds equity every month, nor appreciation, nor the tax treatment of depreciation. A property at 3% cash-on-cash may still return well over 10% once amortisation and a modest price rise are included.

Neither accounts for the eventual sale, where transaction costs of 6% to 10% can erase several years of cash flow. For a full picture across the hold period, internal rate of return is the measure that includes every cash flow and the exit, at the cost of resting on assumptions about a sale you have not made.

Tool: [Try the cash-on-cash return calculator](https://dothecalculation.com/calculators/cash-on-cash-return-calculator) — Model the return on your actual cash after the mortgage payment, with your own financing terms.

**What is a good cap rate?**

It is a market figure, not a target. US multifamily has commonly traded between 4% and 8%, with lower rates in high-demand cities and higher rates where risk or vacancy is greater. A cap rate well above its submarket usually signals a problem rather than a bargain.

**Why does my cap rate not change when I change the down payment?**

Because cap rate deliberately excludes financing. It measures the property, so the mortgage is not part of it. Cash-on-cash return is the metric that responds to your deposit and rate.

**Should the mortgage payment be in net operating income?**

No. NOI stops before debt service. Including the mortgage produces a figure that is neither cap rate nor cash flow and cannot be compared with anything.

**Can cash-on-cash return be higher than the cap rate?**

Yes, whenever the cap rate exceeds the mortgage constant, which is annual debt service divided by loan amount. That is positive leverage, and it reverses as soon as borrowing costs rise past the cap rate.

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_Source: [Do The Calculation](https://dothecalculation.com/blog/property/cap-rate-vs-cash-on-cash-return). Quote freely with attribution and a link to this page._