Cap Rate vs. Cash-on-Cash Return: Which Metric Should Drive the Decision?

Cap rate and cash-on-cash return get used interchangeably, and they shouldn’t be. They answer two different questions. Cap rate asks: how good is this property, ignoring how it’s paid for? Cash-on-cash asks: how hard is my actual cash working in this specific deal? Good screening uses both.

The formulas

• Cap rate = net operating income ÷ purchase price. NOI is rent minus operating expenses (taxes, insurance, HOA, vacancy, maintenance, management) — before any mortgage payment. It’s unlevered: financing never touches it.
• Cash-on-cash return = annual pre-tax cash flow ÷ total cash invested. Cash flow here is NOI minus debt service, and cash invested is your down payment plus closing costs. It’s levered: your loan is the whole point.

Same property, two verdicts

A $250,000 house rents for $2,200/mo with $9,000/yr of operating expenses. NOI is $17,400, so the cap rate is 7.0% — and it stays 7.0% whether you pay cash or finance. Now buy it with 20% down at 7%: debt service runs about $16,000/yr, leaving roughly $1,400 of annual cash flow on ~$57,500 invested — a 2.4% cash-on-cash. Same house, same cap rate, thin deal. At a 5.5% rate the same purchase produces ~8% cash-on-cash. Financing is the difference, and only cash-on-cash sees it.

When to use which

• Use cap rate to compare properties and markets. Because it ignores financing, it’s the clean apples-to-apples number across listings.
• Use cash-on-cash to judge your deal. It reflects your down payment, your rate, and your closing costs — the deal you would actually own.
• Watch the gap between them. Cash-on-cash well above cap rate means leverage is amplifying returns; well below means your financing is eating the deal and a rate change or bigger down payment changes the verdict.

What counts as “good”

Both are market-dependent. In most mid-priced US metros today, screening thresholds of a 5.5–7% cap rate and a positive-and-rising cash-on-cash are reasonable starting filters — see what is a good cash-on-cash return for benchmarks by strategy. Neither metric matters until the deal clears break-even rent with margin.

Getting both without retyping the listing

CashFlowPanel calculates cap rate and cash-on-cash return — along with cash flow and break-even rent — directly on the Zillow or Redfin listing you’re reading, using a comp-based rent estimate and financing assumptions you control.