Cash on Cash Return vs Cap Rate

The cap rate tells you how the property performs. Cash on cash tells you how you perform, mortgage included. Here is the formula, a full worked example, and exactly when each metric matters.

Cash on cash return = annual cash flow after mortgage payments divided by the cash you invested, times 100. A $250,000 property with $18,000 of NOI, a 25% down payment, and a 7% loan produces $3,030.69 of yearly cash flow on $62,500 invested: a 4.85% cash-on-cash return, lower than the property's 7.2% cap rate because borrowing costs exceed the yield.

The two metrics, side by side

Cap rate = NOI / price. It ignores financing entirely, which is why you can use it to compare any two properties apples to apples. Cash on cash return = (NOI - annual mortgage payments) / cash invested. It includes your down payment and your loan, which is why it tells you what your money actually earns. One describes the asset; the other describes your deal. For the property-level number, start with our guide to what a cap rate is.

The cash on cash formula

Cash on cash return = annual pre-tax cash flow / total cash invested x 100. Annual cash flow is NOI minus a full year of mortgage payments (principal and interest). Total cash invested is the down payment plus closing costs; for a clean comparison, investors often use just the down payment and note it.

Worked example: $250,000 rental, 25% down, 7% loan

The property produces $18,000 of annual NOI, a 7.2% cap rate ($18,000 / $250,000). The buyer puts 25% down ($62,500) and borrows $187,500 at 7% for 30 years. The monthly payment is $1,247.44, so annual debt service is $14,969.31.

Annual cash flow = $18,000 - $14,969.31 = $3,030.69. Cash on cash = $3,030.69 / $62,500 x 100 = 4.85%. Notice the gap: the property yields 7.2%, but your cash earns 4.85%. Leverage works against you here because the 7% borrowing cost is close to the cap rate, and closing costs (excluded above) would push the real number slightly lower.

When leverage helps instead

Flip the rates and the story changes. If the same property were financed at 5%, annual debt service would fall to about $12,078, cash flow would rise to roughly $5,922, and cash on cash would climb to about 9.5%, well above the 7.2% cap rate. That is the rule of thumb: when your borrowing rate is below the cap rate, leverage boosts your cash return; when it is above, leverage drags it down. In high-rate markets, this is why all-cash buyers and large down payments look relatively more attractive.

When to use each metric

Use cap rate when comparing properties, underwriting a market, or talking to sellers and brokers, because it strips out everyone's personal financing. Use cash on cash when deciding whether a specific deal is worth your money, choosing between loan structures, or reporting to a partner who cares about what their dollars earn. A deal can have a great cap rate and a lousy cash-on-cash return (expensive debt, thin down payment) or vice versa. Neither number alone tells the whole story, and anyone who quotes only one is selling you something.

What cash on cash leaves out

Like the cap rate, this metric ignores appreciation, loan principal paydown, and tax benefits, so it understates total return. It also ignores the timing of cash flows: a property that needs a $20,000 roof in year two has the same year-one cash on cash as an identical property that does not. Treat it as a first-year screening number, then model the full holding period before committing.

Start with the property's yield

Cash on cash builds on the cap rate. Get the property-level number first with our free calculator: NOI, price, cap rate, and monthly NOI in seconds.

Try the free cap rate calculator

Cash on cash return questions

What is the formula for cash on cash return?

Cash on cash return = (annual cash flow after mortgage payments) / (total cash invested), times 100. Total cash invested includes the down payment plus closing costs. Example: $3,030.69 of annual cash flow on $62,500 invested is a 4.85% cash-on-cash return.

Why is cash on cash return lower than the cap rate?

Because the mortgage costs money. The cap rate ignores financing, while cash on cash subtracts your full debt service before dividing by only the cash you put in. When borrowing costs more than the cap rate, leverage drags your cash return below the property's cap rate; when borrowing costs less, leverage lifts it above.

Is cash on cash return better than cap rate?

Neither is better; they answer different questions. Cap rate compares properties to each other because it ignores financing. Cash on cash judges your specific deal because it includes your down payment and loan. Use cap rate to pick the property and cash on cash to pick the financing.

What is a good cash on cash return?

Many residential investors target 8% to 12% cash on cash, meaning the property returns 8 to 12 cents per year for each dollar invested. The target moves with interest rates and risk: in a high-rate market, 6% can be respectable, while a risky property should pay more.

Does cash on cash return include appreciation?

No. Cash on cash measures only the cash the property throws off in a year relative to the cash invested. Appreciation, principal paydown, and tax benefits are real parts of total return, but they are not in this formula. That makes it a conservative, cash-in-hand number.