Cap Rate vs Cash-on-Cash Return: Asset Yield vs Equity Yield
By Devon Coombs, CPA, MBA · Assistant Teaching Professor of Finance, Santa Clara University · Reviewed October 2026
From the author: Devon Coombs, CPA, MBA teaches finance at Santa Clara University and works with corporate teams on practical AI.
Finance questions & answers · Student career guide · AI training for finance teams · Consulting · The 10 Laws of Finance
A cap rate compares one year of property NOI with price or value, before financing. Cash-on-cash return compares a defined period's cash flow to equity with the cash invested. Use cap rate to discuss property pricing and cash-on-cash to evaluate current equity cash income under a particular loan. Neither measure captures the full timing of a purchase, holding period and sale.
| Cap rate | Cash-on-cash return | |
|---|---|---|
| Formula | NOI ÷ property value | Annual pre-tax cash flow after debt service ÷ equity invested |
| Leverage | Before financing; unchanged by borrowing if NOI and value stay the same | Levered; changes with loan terms |
| What it prices | The asset | The investor's equity position |
| Comparability | Compare consistent NOI periods and property risks; cap rates alone do not make properties equivalent | Specific to one capital structure |
| Role in underwriting | Acquisition pricing and exit value assumptions | Current income test for the equity check |
When Cap rate is the right tool
Use cap rate as a pricing reference for a stabilized property. Keep the NOI definition, measurement period and value date consistent. Different analysts can reach different cap rates because they forecast different NOI or use different prices. Compare lease terms, tenant risk, location and capital needs before treating another sale as comparable.
When Cash-on-cash return is the right tool
Use cash-on-cash return to test the cash income available on the equity you actually invest. State whether the numerator deducts capital spending and reserves and whether closing costs enter the denominator. In a simplified model with no other costs, borrowing at a debt-service constant below the cap rate can increase this yield. Extra costs and amortization can change the result. Review IRR, downside risk and refinancing needs alongside current cash income.
The common mistake
Buyers often compare a market cap rate against a cash-on-cash target as if the two were interchangeable yields, then conclude that a 5 percent cap rate market cannot satisfy an 8 percent cash return goal. The comparison is malformed because one metric is unlevered on value and the other is levered on equity, with the financing terms sitting between them. The same confusion runs in reverse when a leverage-inflated cash-on-cash figure is quoted as evidence the property itself is a bargain, even though the cap rate shows it was fully priced.
One property. Two loans. Very different cash returns.
- $70,000 annual NOI ÷ $1,000,000 price = 7% cap rate.
- Borrow $600,000 interest-only at 5%. Annual interest is $30,000. Cash after interest is $40,000 on $400,000 equity: 10% cash-on-cash.
- At 9% interest, the loan costs $54,000 per year. Cash falls to $16,000 and cash-on-cash to 4%. The property still has a 7% cap rate.
Illustration excludes capital expenditures, reserves, income taxes and transaction costs. Debt changes the equity outcome without changing the underlying property income.
Related question: Why is NOI different from cash I can keep?
References & further reading
Work the numbers yourself
Both concepts are taught in depth, with practice questions, in the free Real Estate Finance course.