Decision guide
Cap Rate vs Cash-on-Cash Return
Understand when to use cap rate, cash-on-cash return, and monthly cash flow when comparing rental properties and financing choices.
Open related calculatorPublished:
Updated:
Quick Answer
Cap Rate vs Cash-on-Cash Return is worth reviewing before you trust a calculator result because the assumptions behind the model usually matter as much as the formula.
Key Takeaways
- Calculate net operating income consistently
- Compare cap rate before applying financing
- Include all initial cash in cash-on-cash return
- Review monthly cash flow in dollars
- Stress-test rent, vacancy, repairs, and interest rate
Cap rate measures the property before financing
Capitalization rate divides annual net operating income by property value or purchase price. It is useful for comparing properties because it does not depend on a particular buyer's down payment or loan.
Cash-on-cash return measures your invested cash
Cash-on-cash return divides annual pre-tax cash flow by the cash invested in the deal. Loan terms, down payment, closing costs, and initial repairs can therefore change the result materially.
Monthly cash flow tests resilience
A percentage return can look attractive while the dollar cushion is thin. Review the monthly cash left after normal expenses and debt service, then stress-test vacancy, repairs, and rent assumptions.
Checklist Before You Decide
- Calculate net operating income consistently
- Compare cap rate before applying financing
- Include all initial cash in cash-on-cash return
- Review monthly cash flow in dollars
- Stress-test rent, vacancy, repairs, and interest rate
FAQ
Which is better, cap rate or cash-on-cash return?
Neither is universally better. Cap rate compares property operations without financing, while cash-on-cash return measures the return on the cash a specific investor puts into the deal.