# Cap Rate vs Cash-on-Cash Return: Formulas & Example

Compare cap rate and cash-on-cash return using a worked rental example, financing costs, cash invested and a correct leverage test.

**Author:** Nathaniel Pitchon-Getzels (Licensed Real Estate Partner & Investment Strategist) — https://www.scouthavens.com/about
**Published:** 2026-09-01 · **Updated:** 2026-10-13
**Category:** Financial Modeling & Returns
**Canonical URL:** https://www.scouthavens.com/blog/cap-rate-vs-cash-on-cash-return

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## Two metrics that answer different questions

Cap rate compares a property’s net operating income with its price or value, independent of the buyer’s loan. Cash-on-cash return compares annual pre-tax cash flow with the cash you invested. Use both: a property can have positive NOI and a respectable cap rate while producing little or negative cash flow after mortgage payments.

Metric

Formula

Includes financing?

Cap rate

Annual NOI ÷ price or value × 100

No

Cash-on-cash return

Annual pre-tax cash flow ÷ cash invested × 100

Yes

## Define the inputs consistently

Start with effective income after vacancy and collection loss. Subtract operating costs such as taxes, insurance, management and routine repairs to obtain NOI. Keep debt service, income taxes and capital projects separate. If you deduct a replacement reserve, label the result and apply the same convention to comparisons; see [the NOI guide](/blog/how-to-calculate-noi-real-estate). Cash invested can include down payment, acquisition costs, immediate rehab and other cash contributions.

## Worked example: a financed rental

Hypothetical property: price $500,000; annual effective income $48,000 after your vacancy assumption; operating expenses $13,000. NOI is $35,000 and cap rate is $35,000 ÷ $500,000 × 100 = 7.00%. These income and expense figures are examples, not market benchmarks.

With a 25% down payment, the loan is $375,000. At an illustrative 6.75% fixed rate amortized over 30 years, monthly principal and interest is approximately $2,432.24 and annual debt service is $29,186.91. Annual cash flow is $5,813.09 before separately modeled capital spending and income taxes. If cash invested is $125,000 down plus $15,000 acquisition costs and repairs, cash-on-cash return is $5,813.09 ÷ $140,000 × 100 = 4.15%.

## Why the interest rate alone is not the leverage test

An amortizing loan payment includes principal as well as interest. In the example, annual debt service divided by the original loan is about 7.78%, above the property’s 7% cap rate even though the note rate is 6.75%. That debt-service burden reduces current cash yield. Closing costs, reserves and other cash contributions also affect cash-on-cash return. A note rate below the cap rate therefore does not guarantee a higher cash-on-cash result.

## Stress-test the margin

An additional $4,000 operating expense reduces NOI to $31,000 and cash flow to $1,813.09. The same property then has a 6.2% cap rate and approximately 1.30% cash-on-cash return on $140,000. Show capital spending and additional reserves separately so the attractive base case does not hide cash needs.

## Which number should you use?

-   Use cap rate for comparable property income yields under consistent expense definitions.
-   Use cash-on-cash return for your financing and actual cash contribution.
-   Review both alongside debt coverage, repair needs and reserves.
-   Do not count appreciation or principal paydown as current spendable cash flow.

Reproduce your deal in the [cap rate calculator](/tools/cap-rate-calculator) and [cash-on-cash calculator](/tools/cash-on-cash-calculator), then follow [step-by-step rental deal analysis](/blog/complete-real-estate-deal-analysis-guide).

## Frequently Asked Questions

**Q: Does cap rate include mortgage payments?**

A: No. Cap rate uses NOI before debt service. Cash-on-cash return uses cash flow after financing payments.

**Q: Does a mortgage rate below cap rate guarantee positive leverage?**

A: No. Amortization, debt-service burden, expenses and cash invested affect the result. Compare actual loan payments and modeled cash returns.

**Q: Can cash-on-cash return be negative?**

A: Yes. If income after operating costs does not cover debt service and other modeled cash outflows, the cash return can be negative.

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*Source: Haven by ScoutHavens (https://www.scouthavens.com). Data methodology: https://www.scouthavens.com/methodology.*