Two conversations happen in small multifamily investing, and beginners get them confused.
Investor A: "I found a fourplex with a 5.2% cap rate."
Investor B: "Yeah, but what's the cash-on-cash return after the mortgage?"
Investor A: [Blank stare]
These are two completely different metrics, and confusing them will cost you money.
Cap Rate: What the Building Actually Produces
Cap Rate = NOI ÷ Purchase Price
It's the annual return your property generates relative to its purchase price, before financing. A building with $15,000 annual NOI purchased for $300,000 has a 5% cap rate. Simple.
Cap rate is property-specific. It doesn't care if you finance with 20% down or 80% down. It's the building's earning power.
Why it matters: Comparing two investment properties requires normalizing financing. A fourplex in Portland with a 5.5% cap rate and one in Nashville with a 6.2% cap rate tell you which property produces more actual rent relative to price.
Cash-on-Cash Return: What You Actually Get
Cash-on-Cash Return = Annual Cash Flow ÷ Your Cash Invested
This is your year-one return on your money specifically. Down payment + closing costs + reserves.
Example:
- Purchase price: $300,000
- Down payment (20%): $60,000
- Closing costs: $8,000
- Reserves: $5,000
- Your total cash out: $73,000
- Annual cash flow after mortgage: $3,500
- Cash-on-cash return: 4.8%
The Same Property, Two Different Metrics
That fourplex with a 5.2% cap rate:
| Financing Scenario | Down Payment | Annual Cash Flow | CoC Return |
|---|---|---|---|
| 20% down ($60,000) | $60,000 | $3,100 | 5.2% |
| 25% down ($75,000) | $75,000 | $1,900 | 2.5% |
| 15% down ($45,000) | $45,000 | $5,100 | 11.3% |
Same cap rate, wildly different cash-on-cash returns. Why? Leverage. Less money down means higher debt service and higher cash flow per dollar invested (until the property stops covering debt).
Which Metric Should You Track?
Cap rate if:
- You're comparing two properties to decide which to buy
- You're thinking long-term appreciation and buy-and-hold
- You're modeling multiple offers on the same property
Cash-on-cash return if:
- You're deciding whether to buy or refinance for cash to buy again
- You want to know your actual percentage return on capital deployed
- You have $100,000 cash and want to know if a $300k deal or a $500k deal makes more sense for year one
Smart play: Calculate both. A property with a 6% cap rate but 8% cash-on-cash return (high leverage, tight loan) can be great. But if the cap rate is 4% and cash-on-cash is 12%, something is broken — you're likely overleveraged and one vacancy blows through all cash flow.
The Ultimate Trap
New investors often buy for "cash-on-cash return" without checking the cap rate. They finance aggressively (10-15% down, maxed-out DSCR loan) and get a 9% first-year CoC return. Feels great. But the property has a 3.8% cap rate — it's a mediocre asset. If you refinance in 5 years, rates are higher, and cash flow collapses. You've now got a $300k property that produces $11,000 annual NOI, and no lender will give you better terms.
Meanwhile, a property with a 6% cap rate and a 5% first-year CoC return (conservative financing) is a fortress. It cash-flows forever, you can refi to pull equity, and other lenders will line up to fund you.
The Math
Model both metrics on the Multifamily Cash Flow Calculator. Enter your purchase price, rent, expenses, and down payment, and you'll see both cap rate (property quality) and cash-on-cash return (financing quality). If you see a 7% CoC return with a 3% cap rate, ask why. The answer is usually "I'm overleveraged."