One shows how the property performs before financing. The other shows how efficiently your invested cash is working after financing.
Net operating income ÷ purchase price
The capitalization rate measures the property’s operating return before financing. Net operating income means rental income minus operating expenses such as taxes, insurance, maintenance, vacancy and management—but before the mortgage.
Annual cash flow before tax ÷ cash invested
Cash-on-cash return includes mortgage payments and measures the annual return on the money you actually put into the deal, usually the down payment plus eligible upfront costs.
A property can have a strong cap rate but a weak cash-on-cash return if financing is expensive. Favorable financing can improve cash-on-cash return without changing the cap rate.
The analyzer calculates NOI from estimated rent and operating expenses, then calculates cap rate before financing. Cash-on-cash return uses your down payment, interest rate, loan term, reserves, and monthly cash flow. These are screening estimates; verify the underlying numbers before investing.
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