The Fundamental Difference
Cap Rate and Cash-on-Cash Return are the two most widely used metrics in real estate investing, but they answer two completely different questions:
- Cap Rate (Capitalization Rate): Measures the unleveraged, all-cash earning potential of the property itself, independent of how you finance it.
- Cash-on-Cash (CoC) Return: Measures the actual cash yield on the specific equity dollars you invested out-of-pocket, factoring in your mortgage and financing terms.
The Formulas
Cap Rate Formula
Cap Rate = (NOI ÷ Purchase Price) × 100
Where NOI = Net Operating Income (Gross Income - Operating Expenses, excluding mortgage debt).
Cash-on-Cash Formula
CoC = (Annual Net Cash Flow ÷ Total Cash Invested) × 100
Where Total Cash Invested = Down Payment + Closing Costs + Initial Rehab.
Worked Example: $400,000 Rental Property
Let's look at a practical scenario:
- Purchase Price: $400,000
- Gross Annual Rent: $42,000
- Operating Expenses (Taxes, Insurance, Maintenance): $12,000
- Net Operating Income (NOI): $30,000
- Unleveraged Cap Rate: $30,000 ÷ $400,000 = 7.50%
Now, let's finance with 25% down ($100k) + $10k closing costs = $110,000 Total Cash In:
- Annual Mortgage Debt Service ($300k loan @ 6.8%): $23,400
- Annual Net Cash Flow: $30,000 - $23,400 = $6,600
- Cash-on-Cash Return: $6,600 ÷ $110,000 = 6.00%
Try our free Cap Rate Calculator and Cash-on-Cash Calculator to model your next deal instantly.
