Two investors look at the same fourplex. One calls it a great deal; the other passes. Often they're both right — they're just answering different questions. Cap rate and cash-on-cash return measure two genuinely different things, and knowing which to lean on is half of reading a deal correctly.
Cap rate: how good is the asset?
Cap rate is net operating income (rent minus operating expenses, before any mortgage) divided by the purchase price. Crucially, it ignores financing entirely. Two buyers paying all cash, paying 20% down, or paying 50% down all see the same cap rate on the same property. That's the point: cap rate isolates the quality of the asset and its price, so you can compare a duplex in Cleveland to a triplex in Tampa on equal footing.
Use cap rate to compare properties to each other and to the market. A cap rate is only "good" relative to the going rate for that asset class in that market — a 5% cap can be excellent in one metro and a hard pass in another.
Cash-on-cash: how good is the deal for you?
Cash-on-cash return is your annual pre-tax cash flow divided by the actual cash you put into the deal — down payment, closing costs, and any upfront rehab. Unlike cap rate, it is entirely about your financing and your capital. Leverage changes it dramatically: the same property can show a modest cap rate but a strong cash-on-cash if you finance it well, because you're earning a return on a smaller slice of cash.
This is the number that answers the question that actually pays your bills: what is the money I personally tied up in this deal earning, versus leaving it in an index fund or another property?
When they disagree
- High cap, low cash-on-cash — usually a financing problem: high rate, low leverage, or heavy upfront cash. The asset is fine; the structure isn't.
- Low cap, high cash-on-cash — leverage is doing the heavy lifting. Great while rates and rents cooperate; more fragile if either moves against you.
- Both low — the deal doesn't work under honest assumptions. Move on.
- Both high — rare, and worth a careful look for what you're missing (deferred maintenance, a soft submarket, an optimistic rent).
The honest answer: use both, in order
Lead with cap rate to decide whether the asset is worth owning at this price. Then use cash-on-cash to decide whether the deal, financed the way you'll actually finance it, beats your alternatives. One without the other is half a picture. And both are only as honest as their inputs — a realistic rent and local taxes and insurance matter more than which ratio you favor.
Mortar computes both deterministically from a fixed, transparent set of assumptions on every listing — so the only thing changing between two deals is the deals themselves. Estimates only; not investment advice.