Cap Rate vs ROI vs Cash-on-Cash Return: What's the Difference?

Cap rate, ROI and cash-on-cash return are the three most quoted return metrics in real estate investing, and they are often confused. The key difference is whether borrowing is counted: cap rate ignores financing, while ROI and cash-on-cash return reflect the money you actually put in.

What is the difference between cap rate and ROI?

Cap rate measures a property's income relative to its value, as if you paid all cash. ROI measures your total return relative to the money you invested, including the effect of a mortgage. If you buy a property with cash and ignore appreciation, the two come out the same.

Cap rate formula

Cap Rate = Net Operating Income (NOI) ÷ Property Value

NOI is annual rent minus operating costs (maintenance, management, insurance, property taxes, vacancy), before mortgage payments. For a full walkthrough see our complete guide to cap rates.

Cash-on-cash return formula

Cash-on-Cash Return = Annual Pre-Tax Cash Flow ÷ Total Cash Invested

Annual cash flow is NOI minus mortgage payments. Total cash invested is your deposit plus closing costs and any upfront repairs.

ROI formula

ROI = (Annual Net Profit ÷ Total Cash Invested) × 100

ROI can include appreciation and principal paid down as well as cash flow, so definitions vary. Always check which version a seller, agent or calculator is using.

Worked example (illustrative numbers)

Item	Amount
Purchase price	$500,000
Net operating income	$30,000 per year
Cash invested (25% deposit + costs)	$140,000
Mortgage payments	$20,000 per year

• Cap rate: $30,000 ÷ $500,000 = 6%.
• Cash flow: $30,000 − $20,000 = $10,000, so cash-on-cash return = $10,000 ÷ $140,000 ≈ 7.1%.

The same property shows 6% on one metric and about 7.1% on the other. Neither is wrong; they answer different questions.

Which metric should you use?

• Comparing properties or markets: cap rate, because it ignores financing and puts deals on equal terms.
• Judging your own return with a mortgage: cash-on-cash return or ROI.
• Best practice: use all three, together with cash flow and risk.

To estimate yield on a specific property, see our guide to gross vs net rental yield, and to judge whether a number is attractive read what is a good cap rate.

Is cash-on-cash return the same as ROI?

No. Cash-on-cash return measures one year's pre-tax cash flow against the cash you actually invested, so it reflects your financing. ROI is broader: it can include price growth, loan principal repaid and the total gain over the whole holding period. Two investors can have the same ROI but very different cash-on-cash returns if one borrowed more.

Frequently asked questions

Is cash-on-cash return the same as ROI?

No. Cash-on-cash return is one year's cash flow divided by the cash invested; ROI can include price growth and loan repayment over the whole holding period.

Is cap rate the same as ROI?

No. Cap rate compares net operating income to property value and ignores financing. ROI compares profit to the cash you invested and reflects any mortgage. They match only for an all-cash purchase with no appreciation.

What is cash-on-cash return?

Cash-on-cash return is annual pre-tax cash flow divided by the total cash you invested. It shows the yearly return on your own money after mortgage payments.

Which is better, cap rate or ROI?

Neither is better. Use cap rate to compare properties and markets, and ROI or cash-on-cash return to measure your own return once financing is included.