Cap rate and cash-on-cash
Four numbers decide whether a rental deal gets financed: cap rate, DSCR, cash-on-cash and gross rent multiplier. They measure different things, and a deal can look good on one while failing on another.
| Metric | Value | Reading |
|---|---|---|
| Net operating income | $29,400 | Before debt service and tax |
| Purchase price | $420,000 | — |
| Cap rate | 7.00% | Above typical threshold |
| Loan amount | $315,000 | 75% LTV |
| Annual debt service | $24,517 | $2,043 per month |
| DSCR | 1.20 | Below the usual 1.25 floor |
| Cash flow after debt | $4,883 | Positive leverage |
| Cash-on-cash | 4.65% | Return on the equity cheque |
| Gross rent multiplier | 10.00 | Price per dollar of gross rent |
| Operating expense ratio | 30.0% | Share of rent consumed by costs |
Cap rate is unlevered and ignores financing. Cash-on-cash is levered and ignores appreciation. Neither is a total return.
NOI / price · unlevered, first-year
NOI / debt service · lenders typically require ≥ 1.25
(NOI − DS) / equity · levered cash yield
price / gross rent · a crude cross-check on price
A clear path from inputs to results.
Four numbers decide whether a rental deal gets financed. Cap rate measures the property, DSCR measures the lender’s comfort, cash-on-cash measures your equity return, and the gross rent multiplier is a crude cross-check on price. A deal can pass one and fail another.
How to use
- Enter the purchase price and the net operating income.
- Add gross annual rent for the multiplier and expense ratio.
- Set the down payment percentage.
- Enter the loan rate and amortisation term.
- Read cap rate, DSCR and cash-on-cash, and check DSCR against the 1.25 lender floor.
The formula
Reference: Appraisal Institute, "The Appraisal of Real Estate", 15th ed.
Worked example
$420,000 property, $29,400 NOI, 25% down at 6.75%
- Price $420,000; NOI $29,400; gross rent $42,000.
- 25% down, 6.75% over 30 years.
- 1
Cap rate: 29,400 / 420,000 = 7.00%.
- 2
Loan: $315,000; payment $2,043 a month, $24,516 a year.
- 3
DSCR: 29,400 / 24,516 = 1.20.
- 4
Cash flow after debt: $4,884; on $105,000 of equity, cash-on-cash is 4.65%.
- 5
GRM: 420,000 / 42,000 = 10.0.
Cap 7.00% · DSCR 1.20 (below the 1.25 floor) · cash-on-cash 4.65% · GRM 10.0.
Interpreting the result
A 7% cap rate with a 6.75% loan is thin but positive leverage — borrowing still adds to the equity return. The DSCR of 1.20 is the problem: most lenders want 1.25, so this deal would need either more down or a lower price. Cash-on-cash of 4.65% is below what most investors accept for the management burden.
Assumptions & limitations
- First-year, static analysis with no rent growth, vacancy or capital expenditure.
- NOI is after operating expenses but before debt service and income tax.
- Closing costs are excluded from the equity figure, which overstates cash-on-cash.
- The loan is fully amortising with a fixed rate and no balloon.
Frequently asked questions
What is a good cap rate?
It depends on the market and asset class: 4–5% in gateway cities, 6–8% in secondary markets, higher for older or management-intensive property. A high cap rate is usually compensation for risk, not a bargain.
What is negative leverage?
When the loan rate exceeds the cap rate. Borrowing then reduces the cash-on-cash return, and every extra dollar of debt makes the deal worse rather than better.
Why does DSCR matter more than cap rate to a lender?
Because the lender is repaid from cash flow, not from value. DSCR measures whether the rent covers the debt service with a cushion; cap rate measures the property’s yield.
Is cash-on-cash the same as total return?
No. It is the first-year cash yield on equity and ignores appreciation, principal paydown and sale proceeds — which often dominate a multi-year return.
Methodology last reviewed 2026-10-18. Results are informational and not financial or engineering advice — see our disclaimer.