Housing & property
Cap rate vs. cash-on-cash return: Definition, Formula and Example
Cap rate compares property net operating income with a stated property value; cash-on-cash return compares pretax cash flow after debt service with cash invested.
Scope: General financial concept; examples are hypothetical.
Other names and related labels: Capitalization rate; Cash-on-cash yield.
How it works
Net operating income generally deducts operating expenses and vacancy but excludes financing, depreciation and income tax. Cash-on-cash depends on borrowing terms and the definition of invested cash. Closing costs, initial repairs and reserves must be included consistently when relevant.
Cap rate = annual NOI / property value; cash-on-cash = annual pretax cash flow after debt service / initial cash investment
State whether property value means purchase price, current value or total acquisition cost. Neither ratio alone includes every appreciation, sale or tax effect.
$16,000 NOI on a $200,000 property
Assume $10,000 annual debt service and $60,000 initial cash investment.
- Cap rate: $16,000/$200,000 = 8%.
- Cash flow after debt service: $16,000 − $10,000 = $6,000.
- Cash-on-cash: $6,000/$60,000 = 10%.
Cap rate is 8%; cash-on-cash is 10% under the stated value and cash definitions.
One annual period, stated operating costs already included in NOI; no income tax, capital gains or new capital expenditure.
The worked example uses the assumptions above. Related tools may model a different scope; check their descriptions before comparing results.
Leverage can change cash returns without improving the property
Debt service affects cash-on-cash even when NOI is unchanged. A projected cap rate is also not a guaranteed return. Use consistent maintenance and capital-expenditure treatment before comparing properties.
Explore with a calculator
- Rental Property Calculator
Inspect the tool’s NOI, financing, initial-cash and sale assumptions.
Sources and checks
- OCC: Commercial Real Estate Lending Handbook
- PropertyMetrics: Cash-on-Cash Return Method and Limitations
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
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