Cap rate
Cap rate = net operating income ÷ property price. It ignores financing, so it measures the property's unleveraged yield — useful for comparing properties regardless of how they're paid for.
Cash-on-cash return
Cash-on-cash = annual pre-tax cash flow ÷ cash invested. It includes your mortgage and down payment, so it measures how hard your actual out-of-pocket dollars work.
Which to use
Use cap rate to compare deals apples-to-apples; use cash-on-cash to judge your real return given your financing. Leverage can make a modest cap rate into a strong cash-on-cash return — or amplify losses.
Frequently asked questions
What's the difference between cap rate and cash-on-cash?
Cap rate ignores financing (unleveraged yield); cash-on-cash includes your loan and down payment (leveraged return on your cash).
Which is better?
Neither — they answer different questions. Use cap rate to compare properties, cash-on-cash to judge your financed return.
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.