Cap Rate vs. Cash-on-Cash Return
Last reviewed August 2026
The short answer: cap rate measures the property — its yield ignoring any loan — so it's for comparing deals. Cash-on-cash return measures your money — the cash return after financing — so it's for judging a specific purchase. Cap rate to screen; cash-on-cash to decide.
They're the two most-quoted rental metrics, and they're constantly confused because both come out as a percentage. The difference is simple once you see it: one includes your mortgage and one doesn't.
Side by side
| Cap rate | Cash-on-cash | |
|---|---|---|
| Formula | NOI ÷ property price | Annual cash flow ÷ cash invested |
| Includes the mortgage? | No — unleveraged | Yes — after financing |
| Best for | Comparing properties on equal footing | Judging a specific financed deal |
| Answers | What does the property itself yield? | What does my cash earn? |
| Changes with your loan? | No | Yes — a lot |
| Typical 'good' range | 5–10% | 8–12% |
Cap rate: the property's own yield
Cap rate is net operating income ÷ price. Because it leaves out financing, two investors buying the same property at the same price get the same cap rate — even if one pays cash and the other borrows 80%. That's what makes it the right tool for comparing properties and benchmarking against a market. Run it on the cap rate calculator.
Cash-on-cash: your return on your money
Cash-on-cash return is annual cash flow ÷ cash invested — your down payment, closing costs, and upfront repairs. It reflects your actual financing, so it changes with your down payment and interest rate. It's the number that tells you what the deal does for you, which is why it's the one to lean on when you've settled on a financing plan.
A worked example
Say a property has $18,000 of NOI at a $300,000 price — a 6% cap rate. Buy it all cash and your cash-on-cash return is roughly that same 6%.
Now finance it: 25% down ($75,000 plus closing costs) at a rate below 6%. The loan payment takes a bite, but you've tied up far less cash — and the leftover cash flow measured against your ~$84,000 invested can push cash-on-cash above 8–10%. Same property, same cap rate, very different cash-on-cash — that's leverage at work. See it on the full calculator.
Frequently asked questions
What's the main difference between cap rate and cash-on-cash return?
Cap rate is unleveraged — it divides net operating income by the price and ignores your mortgage, so it measures the property itself. Cash-on-cash return is leveraged — it divides your annual pre-tax cash flow by the actual cash you invested, so it measures your return after financing. Cap rate compares properties; cash-on-cash evaluates your specific deal.
Which one should I use?
Use both, for different jobs. Cap rate is the fast screen to compare properties and check them against market benchmarks. Cash-on-cash return is what you look at once you've chosen a financing plan, because it reflects your down payment and interest rate. Neither is 'better' — they answer different questions.
Can cash-on-cash return be higher than the cap rate?
Yes, and it often is. When your mortgage rate is below the cap rate, leverage lifts cash-on-cash above it — a 6% cap rate can become a 12%+ cash-on-cash return with favorable financing. When your rate is higher than the cap rate, the opposite happens and cash-on-cash falls below it.
Does cap rate or cash-on-cash include appreciation?
Neither. Both are first-year, income-based metrics — they ignore appreciation, loan paydown, and the eventual sale. For the complete return over your whole hold, look at total ROI and IRR instead.
Is a higher cap rate always better?
Not necessarily. A higher cap rate means more income per dollar of price, but it often comes with more risk, an older property, or a slower-growth market. Lower cap rates are common in expensive, appreciating areas. Match the number to your strategy rather than chasing the highest one.
See both on your property
Cap rate, cash-on-cash, and a verdict — side by side, free.
Open the Rental Property Calculator →