Cap rate
NOI ÷ Property value (or purchase price)
Because NOI excludes mortgage payments, cap rate evaluates property operations independently of how any particular buyer finances it. That makes it useful for comparing properties to each other.
Cash-on-cash return
Annual pre-tax cash flow ÷ Total cash invested
Cash-on-cash includes debt service and depends on how much of your own cash you put in. Change the loan and the result changes, even though the property is identical.
One property, three buyers
Cap rate is the same for everyone: $18,000 ÷ $250,000 = 7.2%.
| 25% down | 40% down | All cash | |
|---|---|---|---|
| Loan amount | $187,500 | $150,000 | $0 |
| Monthly P&I | $1,247 | $998 | $0 |
| Annual debt service | $14,969 | $11,975 | $0 |
| Annual cash flow | $3,031 | $6,025 | $18,000 |
| Total cash invested | $75,000 | $112,500 | $260,000 |
| Cash-on-cash | 4.0% | 5.4% | 6.9% |
| DSCR | 1.20 | 1.50 | — |
At a 7% interest rate the borrowed money costs more than the property yields, so more leverage lowers cash-on-cash. When borrowing costs are below the property's yield, leverage can raise it. That relationship — not a rule like "leverage is good" — is what matters.
Neither metric tells the whole story
- Neither includes appreciation or principal paydown.
- Neither captures tax effects.
- Both depend entirely on the NOI assumption.
- A higher number can reflect higher risk, not a better deal.
Calculate both on your deal
Start with cap rate, then add financing to see cash-on-cash.
Calculate Your Cap RateSources & Further Reading
- Federal Reserve Bank of St. Louis (FRED) — 30-Year Fixed Rate Mortgage Average in the United States. fred.stlouisfed.org/series/MORTGAGE30US
- Consumer Financial Protection Bureau — Buying a house: loan estimates and closing disclosures. www.consumerfinance.gov/owning-a-home/
Sources accessed for review on October 5, 2026. Laws, rates, and programs change — confirm current details at the source.
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