Cap Rate vs. Cash-on-Cash Return: What’s the Difference?

Cap rate measures what a property earns relative to its price, before financing. Cash-on-cash return measures what your own cash earns after the mortgage is paid. Two buyers paying the same price for the same building get the same cap rate, but they can get very different cash-on-cash returns depending on how much they borrow and at what rate.

The capitalization rate (cap rate) is a property’s annual net operating income divided by its purchase price or market value. It is the return you would earn in year one if you paid all cash and ignored closing costs.

Cap rate = Net operating income ÷ Purchase price

NOI is rent minus vacancy minus operating expenses (taxes, insurance, utilities, maintenance, management). It excludes mortgage payments, so the cap rate is a property measure, not a deal measure. Appraisers and brokers use cap rates in reverse to value buildings: value = NOI ÷ market cap rate. A building with $107,040 of NOI in a 5.5% market is worth about $1.95 million.

The cap rate on the purchase price is the going-in cap rate. In later years, NOI divided by the building’s projected value is the cap rate on value. A rising cap rate on value usually means rents are growing faster than you expect values to rise.

Cash-on-cash return is the year’s pre-tax cash flow divided by the total cash you invested to buy the property. It answers a simple question: for every dollar I put in, how many cents come back this year?

Cash-on-cash return = (NOI − annual debt service) ÷ Cash invested

Cash invested is everything you paid out of pocket: down payment, closing costs (land transfer tax, legal, appraisal, inspection, financing fees) and upfront repairs or renovations, minus any credits from the seller. Leaving closing costs out is the most common mistake; on a $1.95 million building they can easily reach $45,000.

Cash-on-cash counts only cash that reaches your bank account. The part of each mortgage payment that pays down principal is building your equity, but it is not cash flow, so it is excluded. So is any increase in the building’s value.

Take an 8-unit building at $1,950,000 with $107,040 of NOI and $45,000 of closing costs. Its cap rate is $107,040 ÷ $1,950,000 = 5.49%, whoever buys it. Here is the year-one cash-on-cash return at different loan-to-value ratios, at an illustrative 4.9% rate over 25 years:

The cap rate never moves. Cash-on-cash return falls from 5.37% to 1.12% as the buyer borrows more. The 75% option also fails most lenders’ DSCR test (1.06), as shown in our DSCR guide.

Borrowing raises cash-on-cash return only when the cap rate is higher than the mortgage constant, the annual payment per dollar borrowed. When the cap rate is lower, each borrowed dollar costs more than the property earns on it. This is called negative leverage.

Mortgage constant = Annual principal and interest ÷ Loan amount

At 4.9% over 25 years, the mortgage constant is 6.91%: every $100,000 borrowed costs $6,911 a year. The building earns 5.49% on its price, so each $100,000 you borrow instead of investing yourself brings in $5,490 of NOI but costs $6,911 in payments: a shortfall of about $1,400 a year. That is why cash-on-cash return falls in the table above as leverage rises.

The constant includes principal, so negative leverage is not all lost money: at 75% loan-to-value, $30,812 of year-one payments go to paying down the loan. Investors in today’s Canadian market are often accepting low cash-on-cash in exchange for that paydown and for expected rent growth. You should make that choice deliberately, with the numbers in front of you.

In mid-2026, Canadian apartment buildings traded at cap rates of roughly 3.75% to 6% depending on the city, according to CBRE’s Q2 2026 survey. Vancouver and Toronto sit at the low end, while the Prairies and Quebec City sit at the high end. These figures are for low-rise Class B buildings, the closest category to a typical multiplex:

A “good” cap rate is one that is at or above the market rate for comparable buildings and high enough to pass your lender’s DSCR test at the loan size you want. Small buildings often trade at different cap rates from the larger assets in CBRE’s survey, so check recent local sales too.

There is no universal target. With Canadian cap rates mostly below today’s mortgage constants, year-one cash-on-cash returns on leveraged multiplexes are often in the low single digits. Any positive figure means the building pays its own way; many investors want enough cushion to absorb a major repair without adding cash.

Because cash flow is thin, it helps to also look at total return on cash, which adds principal paydown (and, if you choose to count it, appreciation) to cash flow. In our 65% loan-to-value example, cash-on-cash is 2.67%, but cash flow plus the $26,704 of year-one paydown is 6.34% of the cash invested, before any appreciation.

PropStack reports both: year-one cash-on-cash and total return on cash. The default deal score targets a 6% cap rate and an 8% total return, and you can change either target to match your strategy.

• Use cap rate to compare buildings with each other and with the market, to judge whether an asking price is reasonable, and to estimate value from NOI.
• Use cash-on-cash return to compare financing options for one building, to compare the deal with other uses of your cash, and to check that the property supports itself.
• Use DSCR alongside both, because a lender’s DSCR minimum often decides how much you can borrow and therefore your real cash-on-cash return.

In PropStack, every deal shows the going-in cap rate, cash-on-cash return and DSCR side by side, with a 10-year projection and scenarios for testing different down payments, rates and amortizations. Try it on a listing, no account needed.