sfrcalc.comCap Rate vs. Cash-on-Cash Return: What Each One Actually Tells You
Every rental property calculator spits out both numbers, and it's easy to glance at them, register "higher is better," and move on. But cap rate and cash-on-cash return answer two different questions, and mixing them up leads to comparing deals that aren't actually comparable.
Cap rate: how good is the property, on its own
Cap rate is net operating income (NOI) divided by purchase price. NOI is rent minus operating expenses — taxes, insurance, maintenance, management, vacancy — but before debt service. That last part is the key: cap rate has nothing to do with how you finance the deal. A cash buyer and a buyer putting 5% down calculate the exact same cap rate on the exact same property.
| Purchase price | $275,000 |
| Annual NOI | $16,500 |
| Cap rate | 6.0% |
That makes cap rate the right tool for comparing a duplex in one neighborhood to a single-family in another, or for sanity-checking whether a seller's asking price is in line with what similar properties trade for. It's a property-quality number, not a you-specific number.
Cash-on-cash return: how good is the deal, for you
Cash-on-cash return is annual pre-tax cash flow divided by the cash you actually put in — down payment, closing costs, and any immediate repairs. Unlike cap rate, this one is entirely dependent on financing. Put less down and use more leverage, and your cash-on-cash return climbs, even though the property itself — and its cap rate — hasn't changed at all.
| 25% down, cash flow $3,600/yr on $75,000 invested | 4.8% CoC |
| 10% down, cash flow $2,100/yr on $30,000 invested | 7.0% CoC |
This is also why cash-on-cash return can look misleadingly attractive on a highly leveraged deal — it rewards thin down payments, which also means thinner margin for error if rates rise at refinance or a vacancy hits. A high cash-on-cash number isn't automatically a better deal; it might just be a more leveraged one.
Side by side
Cap rate
Ignores financing. Compares properties to each other. Answers: "Is this a good property at this price?"
Cash-on-cash return
Depends entirely on financing. Compares deals to your own cash outlay. Answers: "How hard is my actual cash working?"
Why this matters more with a Cash vs. Financing toggle
Many calculators on this site let you flip a property between Cash and Financed purchase types. Switch to Cash, and cash-on-cash return will drop, sometimes sharply, even though nothing about the property changed — you're just measuring a much larger cash outlay against the same income. Cap rate, on the other hand, won't move at all when you toggle financing. That's expected, and it's a good way to see the difference between the two metrics play out on a real number instead of an abstract example.