Cap Rate vs. Cash-on-Cash Return: When to Use Each

Both cap rate and cash-on-cash return are essential metrics, but they answer different questions. Using the wrong one at the wrong time leads to bad decisions.

Cap Rate: The Unlevered View

Cap Rate = Net Operating Income / Purchase Price x 100

Cap rate strips out financing. It tells you what return the property generates regardless of how you pay for it. Use it to:

• Compare properties in different markets
• Evaluate whether a market is "expensive" (low cap rates) or "cheap" (high cap rates)
• Assess the deal before you've decided on financing

Cash-on-Cash: The Levered View

CoC Return = Annual Cash Flow / Total Cash Invested x 100

CoC return includes your specific financing terms. Use it to:

• Evaluate your actual return on the cash you put in
• Compare different financing strategies for the same property
• Decide whether the deal meets your minimum return threshold

Using Them Together

Smart investors check both:

1. 1.Cap rate tells you if the property itself is a good deal for the market.
2. 2.CoC return tells you if the deal works with your specific financing.

A property with a 7% cap rate might yield a 12% CoC return with favorable leverage — or a 3% CoC return with a bad loan.

Quick Reference

Run both metrics side-by-side in Caprium to see the full picture.