Investor guide
Cap Rate vs. Cash-on-Cash Return
Cap rate and cash-on-cash return answer different questions. Cap rate divides annual NOI by purchase price or property value. Because NOI is calculated before debt service, the cap rate lets you compare property operations without regard to how a buyer finances the deal. Cash-on-cash return divides annual pre-tax cash flow by the cash actually invested. Financing, down payment and loan terms therefore affect cash-on-cash return. A high percentage is not automatically a good deal; deferred maintenance, unusually optimistic rents, weak locations or risky leverage can make a high-looking return misleading.
Use the number as a screen, not a verdict
Good underwriting is a process of replacing assumptions with verified facts. Save your first-pass estimate, then update it as leases, tax records, insurance quotes, lender terms, appraisals and inspection findings arrive.