Underwrite
Cap rate vs cash-on-cash: same deal, two returns
Cap rate ignores your loan. Cash-on-cash lives on it. Run both on one set of inputs so you stop arguing which metric "is right." Enter price, NOI (or income/expense build), loan terms, and cash invested; get cap % and CoC % together with a one-line plain-English read.
Assumptions
Returns stack
- Cap rate
- —
- Annual cash flow
- —
- Cash-on-cash
- —
When to use
Teaching a partner the difference; checking whether leverage helps or just adds risk; reading a broker OM that only quotes cap.
When not to
Higher CoC than cap is not automatically "better" - check rate resets and vacancy risk. And garbage NOI makes both metrics lie.
Assumptions: Cap rate = NOI ÷ price (unlevered). CoC = annual cash flow ÷ cash invested after debt service. Neither metric is an appraisal.
Worked examples
Input
NOI $24,000 · Price $400,000 25% down · Debt $16,000 · Cash in $100,000
Output
Cap 6.0% · CoC 8.0%
Leverage can lift CoC when debt is cheap relative to yield.
Input
Same NOI/price all-cash
Output
Cap 6.0% · CoC 6.0%
All-cash - cap and CoC converge when profit equals NOI.
Common traps
- Higher CoC than cap is not automatically "better" - check risk and rate resets.
- Garbage NOI makes both metrics lie.
- Neither metric is an appraisal.