Guide
Cap rate vs cash-on-cash
Team RE Underwrite Lab
Two ratios, two questions
Cap rate asks how much net operating income you typed per dollar of price. It ignores the loan. Cash-on-cash asks how much cash flow you typed per dollar of cash you invested. It depends on the loan, because the loan changed both the cash flow and the cash you had to bring.
They can print the same percent by accident. They are not the same measurement. This page uses a sample where they differ on purpose.
Formula
Cap rate = annual NOI ÷ price. Cash-on-cash = annual cash flow ÷ cash invested.
NOI is before debt service. Cash flow is after the loan payment and after the expenses you already removed. Cash invested is the cash you put in, which might be a down payment, closing costs, and rehab. Each calculator on this site takes the two numbers for its own ratio and does not build the other one.
Example
Illustrative example. Price $315,000 and annual NOI $18,900 is a 6% cap rate, because 18,900 ÷ 315,000 = 0.06. Annual cash flow of $3,150 divided by cash invested of $70,000 is 4.5%, because 3,150 ÷ 70,000 = 0.045. These figures are made up so the two divisions are visible. They are not a property this company owns.
The gap is the point of the sample. A reader who quotes 6% as the cash return is quoting the cap rate, not the cash-on-cash. The rental analysis guide uses a different price and a different NOI.
Common pitfalls
Putting the loan payment inside NOI and then also using cash-on-cash double-counts debt, or it strips the cap rate of the meaning people expect. Keep the payment out of NOI.
Using the purchase price as cash invested ignores that a loan funded most of the price. Cash-on-cash uses the cash you wired, not the full price, unless you bought with cash and that is the number you type.
Questions
Which percent should go in a listing flyer?
This page does not write flyers. If you publish either ratio, label which one it is. They answer different questions.
Can both ratios be useful on the same deal?
Yes. Cap rate is a price-and-income screen. Cash-on-cash is a cash-in and cash-back screen. Neither one replaces the rent, the expenses, or the loan terms.
Why doesn't this sample match the cap rate calculator's defaults?
The calculator keeps its own sample so the widget is easy to check. This guide uses a different price, NOI, cash flow, and cash invested.
Does a higher cap rate mean a higher cash-on-cash?
Not by itself. More debt can raise cash-on-cash while the cap rate stays put, or it can cut cash flow and lower cash-on-cash. You have to type both pairs.
Are these returns a forecast?
No. Each percent is one division of two numbers you type for a year you have in mind.
Example only. Not financial, investment, legal, tax, lending, or appraisal advice.
Estimates only. Not financial, legal, tax, or investment advice. RE Underwrite Lab calculators and PDF reports provide educational estimates based on the numbers you enter. Actual purchase costs, rents, expenses, financing terms, taxes, insurance, vacancy, rehab costs, refinance eligibility, and returns vary by property, market, lender, and local law (including short-term rental rules). We do not guarantee any outcome, profit, cash flow, or appraisal. Some content and tools may be generated or assisted by artificial intelligence and can contain errors. Always verify assumptions with licensed professionals and your own due diligence before making decisions.