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Cap Rate vs. Cash on Cash: Which Metric Should You Trust?

The two most-cited real estate investment metrics measure different things. Use both — and know which one matters when.

5 min readPublished 2026-05-08

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The formulas

  • Cap rate = NOI ÷ purchase price
  • Cash on cash = annual cash flow ÷ total cash invested

They sound similar. They tell you very different things.

What cap rate actually measures

Cap rate is a valuation metric. It tells you what yield a property would produce if you paid all cash and had no mortgage. It's used to:

  • Compare similar properties on equal footing
  • Estimate property value from NOI (price = NOI ÷ market cap rate)
  • Compare submarkets and asset classes

Cap rate doesn't know about your financing. The same property has the same cap rate whether you put 25% down or pay all cash.

What cash on cash measures

Cash on cash is your personal yield. It accounts for:

  • How much you actually put in (down payment + closing + rehab)
  • What you actually keep (cash flow AFTER the mortgage payment)

The same property can have a 6% cap rate but produce a 15% cash-on-cash return if you use leverage well — or negative cash flow if you over-leverage.

When to use which

  • Buying/selling decisions — cap rate. Compare against market cap rates in the area.
  • Comparing your actual deals — cash on cash. This is what hits your bank account.
  • Refinancing analysis — both. Cap rate is fixed; cash on cash shifts dramatically with new financing.
  • Lender conversations — cap rate + DSCR (debt service coverage ratio). Lenders rarely care about your cash on cash.

A worked example

A $500K duplex with $40K NOI:

  • Cap rate = $40K ÷ $500K = 8%

Two financing scenarios:

| | All cash | 25% down | |---|---|---| | Cash invested | $500K | $135K (down + closing + reserves) | | Annual cash flow | $40K | $12K (after $28K mortgage) | | Cash on cash | 8% | 8.9% |

Now with a higher rate that pushes mortgage to $35K/year:

| | All cash | 25% down | |---|---|---| | Cash invested | $500K | $135K | | Annual cash flow | $40K | $5K | | Cash on cash | 8% | 3.7% |

Same property. Same cap rate. Wildly different cash on cash.

Bottom line

Cap rate tells you about the property. Cash on cash tells you about your investment in the property. Run both via the Cap Rate calculator and Cash on Cash calculator before committing.

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