CostCap rate measures a property's return as if bought entirely in cash, ignoring your mortgage — useful for comparing properties. Cash flow measures what's actually left in your pocket each month after your specific mortgage payment. A property can have a healthy cap rate and still be cash-flow negative once financed.
What cap rate measures
Cap rate (capitalization rate) is annual net operating income divided by the property's purchase price, expressed as a percentage. Net operating income means rental income minus operating expenses — property tax, insurance, maintenance, vacancy allowance, and property management if you use it — but before any mortgage payment. Because it deliberately excludes financing, cap rate is a way to compare properties against each other on a level playing field, independent of how each one happens to be financed.
What cash flow measures
Cash flow is what's actually left over each month after every expense including your mortgage payment — the real number that hits your bank account. Two identical properties with the same cap rate can have very different cash flow depending on the down payment and rate you finance them with, since a bigger down payment means a smaller mortgage payment and, all else equal, better cash flow (at the cost of tying up more capital).
Why the two numbers can disagree
A property can be cash-flow negative — costing you money out of pocket every month — while still having a perfectly respectable cap rate, if it's financed with a small down payment at a high rate. That doesn't automatically make it a bad investment: you might be betting on appreciation, principal paydown building equity over time, or both, rather than monthly income. It does mean negative cash flow needs to be a deliberate, informed choice rather than a number you discover after closing.
A worked example
$500,000 rental, $2,600/mo rent, 20% down at 5.5%
| Annual rental income | $31,200 |
| Annual operating expenses (est.) | $9,800 |
| Net operating income | $21,400 |
| Cap rate | 4.28% |
| Monthly cash flow after mortgage payment | -$140 |
A 4.28% cap rate is a reasonable, market-typical return on paper — but this specific deal is still $140/month cash-flow negative once the actual mortgage is factored in. Neither number alone tells the full story; you need both. Run your own property's full numbers, including CRA-aligned expense categories, on the rental cash flow calculator, which also calculates cash-on-cash return.
Before you commit, check what financing terms would flip this specific deal to positive cash flow, or compare it against the numbers on your primary residence with the mortgage payment calculator.