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

The Short Answer

Cap rate measures the unlevered return of the property — what it would yield in cash if you paid 100% cash.

Cash-on-cash return measures the levered return on yourcash — what you're actually earning on the equity you invested.

The Formulas

Worked Example

You buy a Dollar General NNN property:

• Purchase price: $1,800,000
• Annual NOI: $108,000
• Down payment (35%): $630,000
• Loan ($1.17M at 6.5%, 25yr amort): $94,620/yr debt service

Same property, two radically different numbers. The cap rate (6%) tells you the unlevered yield. The cash-on-cash (2%) tells you what you're actually getting on your $680K after debt service.

When Does Leverage Help?

Leverage increases cash-on-cash return when the cap rate exceeds the borrowing cost — a concept called positive leverage. In our example, the 6% cap rate vs. 6.5% borrowing cost creates negative leverage — debt is hurting, not helping.

At current interest rates (early 2026), most NNN deals have minimal or negative leverage from traditional bank financing. That's why many NNN investors are now buying all-cash or with minimal leverage — the economics only work when cap rates compress (likely as rates decline) or you accept lower current yield in exchange for long-term appreciation.

Which Metric to Use When

Other Metrics Worth Knowing

• Internal Rate of Return (IRR)

  Measures total return (cash flow + sale proceeds) over the full hold period, time-weighted.

• Debt Service Coverage Ratio (DSCR)

  NOI / Debt Service. Lenders require 1.20–1.30+ typically. Key to loan approval.

• Equity Multiple

  Total cash distributions / cash invested. Simple multiplier — 2x means you doubled your money over the hold.

• Yield on Cost

  For development: Stabilized NOI / Total Development Cost. Used to measure the development spread vs. market cap rate.