Cash-on-Cash Return vs Cap Rate: Which One to Use (2026)
Cap rate ignores the mortgage; cash-on-cash return is built around it. A 3.9% cap rate property returns −8.5% cash-on-cash at 20% down and −2.2% at 35%.
Cap rate is net operating income divided by the purchase price, the property's yield with no mortgage. Use it to compare properties. Cash-on-cash return is annual pre-tax cash flow divided by the cash you actually put in, the yield on your money after the mortgage. Use it to decide how much to borrow. When the cap rate is below the mortgage rate, borrowing more makes cash-on-cash worse: a 3.9% cap rate property returns −8.5% cash-on-cash at 20% down and −2.2% at 35%. When the cap rate is above the mortgage rate, leverage does the opposite.
Figures come from the CostToClose cap rate and return calculator.
The two formulas
Cap rate
NOI ÷ price. NOI is rent less vacancy, tax, insurance, maintenance and management, not the mortgage.
Cash-on-cash
(NOI − annual mortgage payments) ÷ cash invested. Cash invested is the down payment plus closing costs.
Cap rate does not change with your financing. Cash-on-cash changes with every dollar of down payment and every basis point of rate.
Worked example from the calculator
$500,000 property, $2,600 rent, NOI $19,552 (cap rate 3.9%), mortgage at 5.5%, closing costs $15,000:
| Down payment | Cash invested | Annual mortgage payments | Cash flow | Cash-on-cash |
|---|---|---|---|---|
| 20% | $115,000 | $29,299 | −$9,747 | −8.5% |
| 35% | $190,000 | $23,805 | −$4,253 | −2.2% |
| 50% | $265,000 | $18,312 | $1,240 | +0.5% |
| 100% (no mortgage) | $515,000 | $0 | $19,552 | +3.8% |
Figures computed using the CostToClose calculator, 14 September 2026.
The last row is the cap rate (almost; closing costs dilute it slightly). Every row above it is worse because the money borrowed at 5.5% is earning 3.9%. Leverage magnifies the spread between the two rates, in whichever direction it runs.
The same property with a 6.5% cap rate
Raise the rent to $3,700 (NOI $32,752):
| Down payment | Cash flow | Cash-on-cash |
|---|---|---|
| 20% | $3,453 | +3.0% |
| 35% | $8,947 | +4.7% |
| 100% | $32,752 | +6.4% |
Now the property earns more than it borrows at, so cash-on-cash rises with less leverage but stays positive at every level. The cap rate told you the property was better; the cash-on-cash told you how much of that you keep at each financing level.
Which one when
- Screening listings: cap rate. It strips out financing so two properties compare on their own merits.
- Deciding down payment or whether to refinance: cash-on-cash.
- Comparing against other investments: neither alone. Add principal paydown and expected appreciation for a total return, and remember that cap rate and cash-on-cash are both pre-tax.
- The one-line test: if cap rate is below your mortgage rate, every dollar you borrow costs you cash flow. That is not automatically a reason to walk away, but it is the reason the property will not pay you monthly.
What changes the number
- Closing costs dilute cash-on-cash (they are in the denominator) but not cap rate.
- Management fees reduce both.
- Interest rate moves cash-on-cash by roughly 1 percentage point of return for every 0.5% of rate at 20% down.
- Rent increases move cap rate and cash-on-cash together.
Frequently asked questions
What is a good cash-on-cash return for a rental property?
Positive, first. Above 5% to 8% is strong in today's Canadian market; most single-unit rentals in large cities are negative at 20% down because cap rates sit below mortgage rates.
Why is cap rate different from cash-on-cash return?
Cap rate ignores the mortgage; cash-on-cash includes it and measures return on the cash you put in rather than on the whole price.
Does a higher down payment increase cash-on-cash return?
Only when the cap rate is below the mortgage rate — the usual case in 2026. When the cap rate exceeds the mortgage rate, more leverage increases cash-on-cash.
Is cap rate calculated with or without the mortgage?
Without. Cap rate is net operating income divided by price and never includes financing.
Should I include principal paydown in cash-on-cash?
No; cash-on-cash is a cash metric. Principal paydown is real return but shows up as equity, not cash — add it separately for total return.
Sources
- CostToClose cap rate and cash flow engine — 14 Sept 2026
- Canada Revenue Agency, Rental income guide T4036 (deductible expenses) — checked 14 Sept 2026
- CMHC, Rental Market Report methodology — checked 14 Sept 2026
This guide gives general information for Canadian home buyers and sellers, checked against the sources listed above on the date shown. It is not legal, tax, or mortgage advice. Because rules and rates change, confirm current figures with your lawyer or notary, your lender, or the government office that administers the tax before relying on them.