CostCap rate measures a property's return independent of financing, useful for comparing properties on equal footing. Cash-on-cash return measures your actual return on the cash you personally invested, factoring in your specific mortgage — more relevant if you're financing the purchase, which most buyers are.
Cap rate, briefly recapped
As covered in our cap rate and cash flow guide, cap rate is net operating income divided by purchase price, deliberately ignoring how the property is financed — it answers "how does this property perform on its own merits?"
What cash-on-cash return measures instead
Cash-on-cash return is annual pre-tax cash flow (after your actual mortgage payment) divided by the actual cash you put in — your down payment plus closing costs. Unlike cap rate, it's directly shaped by your financing: a bigger down payment lowers your mortgage payment (improving cash flow) but also increases the cash invested in the denominator, so more leverage doesn't automatically mean a better or worse cash-on-cash number — it depends on the specific numbers.
Which one to use, and when
Same $500,000 property, two financing scenarios
| Cap rate (both scenarios — ignores financing) | 4.3% |
| Cash-on-cash, 20% down | 2.1% |
| Cash-on-cash, 35% down | 5.8% |
Notice the cap rate doesn't change at all between the two scenarios — it's the same property. But cash-on-cash return swings significantly based purely on how it's financed. Use cap rate to compare different properties against each other on equal footing; use cash-on-cash return to understand what a specific deal, with your specific financing plan, actually returns on the money you're putting in. Neither one alone tells the whole story — see both calculated together on the rental cash flow calculator.