Two numbers, two different questions
Cap rate asks "how good is this property, ignoring how I pay for it?" — useful for comparing deals on equal footing. Cash-on-cash return asks "what am I actually earning on the cash I put in, given my specific loan?" — the number that matters most once financing is locked in. Both matter, for different decisions.
Cash flow first, appreciation second
A property with negative monthly cash flow relies entirely on future appreciation to pay off, which is a much riskier bet than one that pays for itself month to month. If you're weighing this against living in the property yourself instead, see the Rent vs Buy Calculator for that personal-housing comparison.
Frequently asked questions
What is cap rate?
Capitalization rate is a property's net operating income divided by its purchase price — a financing-independent measure of return, as if you bought the property in cash. It lets you compare properties regardless of how each is financed.
What is cash-on-cash return?
The annual cash flow (after financing costs) divided by the actual cash you invested — your down payment and closing costs. Unlike cap rate, it reflects the effect of your specific loan, showing the real return on the money you put in.
What counts as a good cap rate?
It varies heavily by market and property type — many investors look for roughly 4-10%, with lower rates common in expensive, low-risk markets and higher rates in higher-risk or higher-maintenance ones. Compare within your specific market rather than against a universal number.
Does this include vacancy or maintenance reserves?
Only what you enter under "other monthly expenses" — build a realistic allowance for vacancy, repairs and property management into that figure rather than assuming 100% occupancy and zero maintenance.
Last updated: June 2026