Two metrics dominate investment property analysis — cap rate and cash-on-cash return. Both measure profitability, but they answer different questions. Confusing them leads to poor buy decisions.

Cap Rate: Property Value Independent of Financing

Cap rate (capitalisation rate) measures a property's unlevered yield — what you'd earn if you paid all cash and had no mortgage.

Cap Rate = Net Operating Income (NOI) / Current Market Value × 100 NOI = Annual Gross Rent - Vacancy - Operating Expenses (excl. debt service)

A $350,000 property with $22,000 NOI has a cap rate of 6.3%. Cap rate is useful for comparing properties regardless of how they're financed, and for estimating value when you know NOI and local cap rate norms.

Cash-on-Cash Return: Levered Yield on Your Actual Cash

Cash-on-cash (CoC) measures the annual pre-tax cash flow relative to the cash you actually invested (down payment + closing costs).

CoC Return = Annual Pre-Tax Cash Flow / Total Cash Invested × 100 Annual Cash Flow = NOI - Annual Debt Service (mortgage P+I)

The same property with 25% down ($87,500) and a $1,900/month mortgage has annual cash flow of $22,000 − $22,800 = −$800, giving a CoC of −0.9% — a negative cash flow deal despite a decent cap rate.

When to Use Which Metric

QuestionUse This
Is this market priced fairly vs. other markets?Cap Rate
Will this deal cash flow with my loan terms?Cash-on-Cash
How does this compare to stocks/REITs?Cap Rate
What's my actual annual return on invested cash?Cash-on-Cash
Valuing a commercial building for purchase/saleCap Rate

Getting Both Metrics via API

ZipMarketData's /property-estimate endpoint returns both cap rate and cash-on-cash projections for any ZIP code, using HUD rents, median sale prices, and regional expense ratios:

GET /property-estimate?zip_code=30301 { "zip_code": "30301", "estimated_cap_rate": 5.8, "cash_on_cash_25pct_down": 3.2, "annual_cash_flow": 2800, "noi": 19200 }