Cash on Cash Return vs Cap Rate
Two yields, two different questions. The difference is leverage.
Property metric vs deal metric
Cap rate and cash on cash return get mixed up constantly because both are yields expressed as percentages, but they answer different questions. Cap rate = net operating income ÷ property value, with no financing anywhere in the math. It is a property metric: two investors buying the same building with different loans get the same cap rate.
Cash on cash = annual cash flow after debt service ÷ cash invested. It is a deal metric: the same two investors get very different CoC returns, because the one using a cheap 30-year fixed mortgage is levered differently from the one paying cash. When the cap rate exceeds your mortgage constant (annual debt service ÷ loan balance), leverage amplifies your return — that is positive leverage, the whole engine of rental investing.
| Cap Rate | Cash on Cash | |
|---|---|---|
| Formula | NOI ÷ property value | Cash flow after debt ÷ cash invested |
| Includes financing? | No | Yes |
| Answers | Is this a good property? | Is this a good deal for my money? |
| Same for every buyer? | Yes | No — depends on your loan |
Quick leverage check: if cap rate > your mortgage constant, adding debt raises your cash on cash return. If it is lower, every dollar borrowed is diluting your yield.
