Cap rate vs cash-on-cash vs IRR: which metric to use (and when)
Cap rate, cash-on-cash, and IRR answer different questions. Here’s when each metric matters most—and how to use them together.
Investors love arguing about metrics. Most disagreements happen because each metric answers a different question.
This guide keeps it simple and practical: use the metric that matches your decision.
Use the calculators:
Cap rate: “What’s the unlevered income return?”
Cap rate = NOI ÷ price (or value)
Use cap rate when you want to compare properties across:
- similar asset types
- similar stabilization levels
- similar markets
Cap rate is best when the question is pricing (value per dollar of NOI).
Cash-on-cash: “What’s my return on the cash I put in?”
Cash-on-cash = annual cash flow ÷ total cash invested
Use cash-on-cash when you’re comparing leveraged deals and you care about:
- down payment
- closing costs
- rehab costs
- debt service
Cash-on-cash is sensitive: small changes in rent, expenses, or interest rate can swing it a lot.
IRR: “What’s my annualized return over time?”
IRR (Internal Rate of Return) incorporates timing:
- interim cash flows
- sale proceeds later
- changes in rent/expenses over a hold period
Use IRR when:
- you’re comparing deals with different hold periods
- you expect meaningful appreciation or value-add
- you want one number that includes cash flow + exit
A quick mental model
- Cap rate is a pricing lens on NOI.
- Cash-on-cash is a cash efficiency lens on your equity.
- IRR is a time lens on the whole investment.
If you only use one:
- Cap rate ignores financing.
- Cash-on-cash ignores time and exit.
- IRR can hide bad fundamentals if your assumptions are optimistic.
A simple example (same property, different financing)
Assume stabilized NOI is the same in both cases.
- Cap rate doesn’t change when financing changes.
- Cash-on-cash improves with cheaper debt (or higher leverage), but leverage can increase risk.
- IRR depends on both cash flow and what you assume at sale.
This is why you should stress test and sanity-check assumptions.
Practical workflow (what to do on a real deal)
- Start with NOI + DSCR + cash flow: Rental Deal Analyzer
- Check cap rate vs local norms: Cap Rate Calculator
- Check cash-on-cash vs your target: Cash-on-Cash Return Calculator
- If it’s value-add or long hold, run a projection and view IRR (the Deal Analyzer includes a simple projection).
For deeper decisioning, keep everything attached to a deal record so you can reuse your work later: Property Underwriting.