Quick Answer
Cap rate measures what the property itself earns before financing; cash-on-cash measures what your cash earns after it. On the worked example in this article, a hypothetical $400,000 rental with $17,976 in annual net operating income shows a 4.5% cap rate, a 4.5% cash-on-cash return if bought all cash, and roughly a negative 10.5% cash-on-cash return with 20% down at a 7.32% rate. Same house, different answers, because financing changes cash-on-cash and does not move cap rate at all.
The Two Numbers Investors Quote Without Defining
Walk into any real estate investing conversation and two numbers come up fast: cap rate and cash-on-cash return. They are often quoted in the same sentence, as if they were two ways of saying the same thing. They are not. Cap rate measures what the property itself earns before financing. Cash-on-cash return measures what your actual cash earns after financing. This article shows how to calculate both, what each one can and cannot tell you, and how to use them on a Las Vegas rental without fooling yourself.
This is educational context, not financial, tax, or legal advice, and nothing here is a promise of return. Every property is its own deal, and the only numbers that matter for your decision are the ones you verify for that specific address.
Cap Rate Answers: What Does the Property Earn Before Financing?
Cap rate, short for capitalization rate, is annual net operating income divided by the purchase price:
CAP RATE = ANNUAL NET OPERATING INCOME / PURCHASE PRICE
Net operating income, or NOI, starts with the rent the property collects and subtracts the operating costs of running it: vacancy, repairs and maintenance, property management, property taxes, insurance, and HOA dues if any. Debt service is not part of NOI. Cap rate deliberately ignores the mortgage because its job is to evaluate the property as an income asset, not your particular financing. The cap rate section of the investor guide explains the same formula in more detail.
A cap rate is a comparison tool. Two similar houses in the same part of the valley, similar age and condition, similar rent: the one with the higher cap rate produces more income per dollar of price. Cap rate is the closest thing real estate has to a yield on the asset, and it is how investors compare properties with very different prices.
Cash-on-Cash Answers: What Does My Cash Earn After Financing?
Cash-on-cash return is annual pre-tax cash flow divided by the total cash you invested:
CASH-ON-CASH = ANNUAL PRE-TAX CASH FLOW / TOTAL CASH INVESTED
Cash flow is NOI minus debt service, your mortgage payment. Total cash invested is your down payment plus closing costs, plus any rehab you funded out of pocket. If you pay all cash, cash invested is the purchase price plus closing costs, and there is no debt service. The cash-on-cash section of the investor guide covers the same ground.
Here is the relationship to remember: when you pay all cash and ignore closing costs, cap rate and cash-on-cash return are the same number. Financing splits them apart. The mortgage reduces cash flow, and the smaller cash investment shrinks the denominator. That is why the two numbers can tell very different stories about the same house.
A Worked Example on One Hypothetical House
To see how the two numbers diverge, use a simplified example with round, made-up numbers. This is an illustration of the math, not a market claim and not a recommendation to buy any particular property.
- Purchase price: $400,000
- Monthly rent: $2,400, assumed for the example
- Vacancy reserve: 5% of rent, $120 a month
- Repairs and maintenance reserve: 8% of rent, $192 a month
- Property management: 10% of rent, $240 a month
- Property taxes: about $150 a month
- Landlord insurance: about $150 a month
- HOA dues: $50 a month, for communities that have an HOA
Operating expenses total $902 a month, so net operating income is $1,498 a month, or $17,976 a year. Cap rate is $17,976 divided by $400,000, about 4.5%.
Now run two ways to buy it.
All cash: $400,000 invested, no mortgage. Annual cash flow equals NOI, $17,976. Cash-on-cash return is $17,976 divided by $400,000, about 4.5%. Cap rate and cash-on-cash match, as they should when there is no debt. Closing costs would add to the cash invested and pull the number down slightly; they are left out here for simplicity.
Financed: 20% down is $80,000, and the $320,000 loan at 7.32%, the average 30-year fixed rate in Freddie Mac's Primary Mortgage Market Survey for the week ending October 22, 2026, carries principal and interest of roughly $2,200 a month, about $26,400 a year. Annual cash flow is NOI minus debt service: $17,976 minus $26,400, about $8,424 negative. On the $80,000 invested, cash-on-cash return is roughly negative 10.5%.
Same house. Same rent. Same expenses. The cap rate does not move: 4.5%. The cash-on-cash return goes from 4.5% all cash to negative financed, purely because of the mortgage.
Two notes on the example. First, negative cash flow does not mean the loan balance is not shrinking; principal paydown builds equity, it just is not cash income. Second, the example is deliberately not a deal recommendation. It is the math doing what the math does, and it is exactly why you run the numbers before you buy, not after.
Why Both Numbers Matter and Neither One Is Total Return
- Cap rate ignores financing, principal paydown, appreciation, and tax effects. It measures current operating income against price.
- Cash-on-cash ignores principal paydown and appreciation too. It measures cash yield on cash invested.
- Neither number predicts appreciation. Two properties with identical cap rates can appreciate very differently, and appreciation is not promised for either.
- Cash-on-cash is very sensitive to the down payment. The same deal can show a decent return at 40% down and a negative one at 15% down, which is another way of saying leverage cuts both ways.
Use cap rate to compare properties and to see how the market prices income in a given area. Use cash-on-cash to judge whether the deal does what you need it to do with the cash you are putting in. Use both, because they answer different questions.
Current Financing Context: Rates Change the Answer
The average 30-year fixed mortgage rate was 7.32% in Freddie Mac's Primary Mortgage Market Survey for the week ending October 22, 2026, down from 7.40% the week before and 7.28% in the week ending October 1. Investment-property loans generally price above owner-occupied loans, and DSCR pricing varies by lender, loan-to-value, and borrower profile, so the index rate is a starting point, not your rate. The investor financing guide explains how conventional investment loans, DSCR loans, and hard money actually underwrite.
At rates above 7%, the mortgage payment is the largest line item in most rental projections, and it frequently exceeds what the rent leaves behind after operating costs. That is the gap the example above shows, and it is why the October 2026 market update stressed re-running every deal at today's rate instead of the rate on an old spreadsheet. The September 2026 data behind that update: median existing single-family home price of $470,000, about a five-month housing supply, and rents flat year over year.
Common Ways Investors Misuse These Numbers
- Gross-rent cap rate. Dividing gross rent by price and calling it a cap rate forgets vacancy, repairs, management, taxes, insurance, and HOA dues. The result is a fantasy number.
- Comparing unlike properties. Cap rates across different property types, ages, conditions, and submarkets are not directly comparable. Compare like with like.
- Treating cap rate as total return. It ignores appreciation and principal paydown, which can be most of the wealth building in a long-term rental.
- Trusting someone else's NOI. Verify rent and every expense line yourself. A seller's or listing agent's projection is a starting point for discussion, not underwriting.
- Forgetting closing costs in the cash-on-cash denominator. The cash you invest includes closing costs and any rehab, not just the down payment.
- Using last year's rate. The cash versus financing comparison exists because the financed scenario changes with the rate. Re-run it at today's number.
How to Build Both Numbers for a Specific Las Vegas Address
- Search current listings in the live MLS search and filter to the area, price range, and property type that fit your buy box.
- For any address that looks interesting, order a free Property DNA report to see ownership, liens, taxes, and value signals before you spend time on the math.
- Verify the rent against actual comparable rentals in the same complex or street. A projection is not a number you can underwrite on.
- Build the expense stack. The rental calculator in the investor guide walks through vacancy, repairs, management, taxes, insurance, and HOA, and the stress test adds a vacancy month and a repair event.
- Run the cash versus financing comparison so you see cap rate and cash-on-cash under both scenarios, and recompute at today's rate.
The investor guide also covers the investor buy box, the 70% rule for flips, and calculators for fix and flip, ARV, rehab budgets, BRRRR, and holding costs, so the same discipline carries over to every strategy. For a fuller look at rental deal analysis, How to Evaluate a Las Vegas Investment Property walks through the whole checklist, and What Can Go Wrong With a Las Vegas Rental shows where the expense stack bites.
Why Professional Representation Matters
A local agent earns the fee in the details: which streets rent quickly, what comparable rentals actually command, which HOAs have rental caps and lease-length rules, and whether a buy box makes sense at today's rates. Pulling current comparables and rents for a specific address is exactly what Lisa does for investors, and she can help you build the two numbers above for a property you are actually considering. Contact Lisa or start with a free home value analysis for a property you are eyeing.
The Bottom Line
Cap rate and cash-on-cash return answer two different questions. Cap rate compares the property as an income asset before financing. Cash-on-cash measures what your cash does after financing. Compute both on every deal, with verified rent and expenses and today's rate, and never mistake either one for total return. The calculators in the investor guide do the math; the discipline of feeding them honest inputs is yours.
