Cap rate & cash-on-cash FAQ
The two formulas every rental investor uses — what they mean, how to calculate them, and what a good number looks like.
Last updated October 2026
Cap rate
NOI ÷ Property Value × 100
The property's return, ignoring financing.
Try the cap rate calculator →Cash-on-cash return
Annual Cash Flow ÷ Cash Invested × 100
Your money's return, including the mortgage.
Try the cash-on-cash calculator →Cap rate questions
What is the cap rate formula?
Cap rate = Net Operating Income (NOI) ÷ Property Value × 100. NOI is the property's annual rental income minus operating expenses like taxes, insurance, maintenance, and vacancy — but not mortgage payments. A property with $18,000 of NOI worth $300,000 has a 6% cap rate.
What is a good cap rate for a rental property?
Most residential rentals trade between 4% and 10%. Lower cap rates (4–6%) usually mean stable, high-demand areas with lower risk and lower cash flow. Higher cap rates (8–10%+) often signal lower-priced markets with more risk or management intensity. A 'good' cap rate depends on your market and risk tolerance — compare it against similar properties in the same area, not a national average.
Does cap rate include the mortgage?
No. Cap rate is deliberately financing-independent: it measures the property's unlevered return as if you paid all cash. That makes it useful for comparing properties on equal footing. Your mortgage payment affects cash-on-cash return, not cap rate.
What expenses go into NOI for the cap rate calculation?
Include property taxes, insurance, maintenance and repairs, property management, utilities you pay, HOA dues, and a vacancy allowance. Exclude mortgage principal and interest, income taxes, depreciation, and capital expenditures like a new roof — those are not operating expenses.
How do I calculate cap rate on a property I'm thinking of buying?
Estimate annual gross rent, subtract a vacancy allowance (5–10% is common), then subtract all operating expenses to get NOI. Divide NOI by the purchase price and multiply by 100. Use realistic expense figures — seller-provided numbers often understate costs.
Cash-on-cash questions
What is the cash-on-cash return formula?
Cash-on-cash return = Annual Pre-Tax Cash Flow ÷ Total Cash Invested × 100. Annual pre-tax cash flow is NOI minus annual mortgage payments. Total cash invested includes your down payment, closing costs, and any rehab costs. If you invest $60,000 and pocket $4,800 per year after the mortgage, your cash-on-cash return is 8%.
What is a good cash-on-cash return?
Many investors target 8–12%, though what's 'good' depends on your alternatives and the deal's risk. A 6% return on a turnkey property in a strong market may beat a 12% return on a heavy-rehab in a declining area. Compare it against what the same cash would earn elsewhere.
What is the difference between cap rate and cash-on-cash return?
Cap rate ignores financing — it measures the property's return as if bought with cash. Cash-on-cash return includes your mortgage, so it measures the return on the actual money you put in. The same property can have a 6% cap rate and a 9% cash-on-cash return if the loan terms are favorable, or a 3% cash-on-cash return if they aren't.
Can cash-on-cash return be negative?
Yes. If the mortgage payment and expenses exceed the rent, your annual cash flow is negative and so is the return — you're paying out of pocket each month to hold the property. Some investors accept this temporarily for appreciation, but it's a risk, not a return.
Does cash-on-cash return account for appreciation or loan paydown?
No. It only measures the cash income relative to cash invested in year one. It ignores appreciation, principal paydown, and tax benefits — which is why it's a screening metric, not a complete picture of total return.
Using them together
Which metric should I use when analyzing a rental property?
Use both. Cap rate tells you whether the property itself is priced fairly relative to its income. Cash-on-cash tells you what your money actually earns given your financing. A deal can look good on one and poor on the other — you want both to work.
Why is my cash-on-cash return lower than the cap rate?
Usually because your mortgage interest rate is higher than the cap rate. When the cost of debt exceeds the property's unlevered yield, leverage works against you and reduces your cash return. When the cap rate exceeds the loan rate, leverage amplifies your return.
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