Cap Rate vs Cash-on-Cash: Which Metric Really Matters in Multifamily Investing?

Step into any multifamily meetup and a quick glance at the whiteboard reveals two figures dominating conversation: cap rate and cash-on-cash return. To newcomers the pair can look identical, yet they answer different questions. One gauges the property’s income engine at the asset level, the other tests the strength of euros parked in the deal. Treating them as rivals, rather than complementary gauges, can nudge an investor off course.

Grasping what each number truly signals - and where it hides its blind spots, turns a routine search on LoopNet into purposeful hunting.

Cap rate equals net operating income (NOI) ÷ purchase price or value.

Think of it as the yield on the brick-and-mortar itself, stripped of financing. A five-unit building generating €90,000 in NOI that trades for €1.2 million sits at 7.5%. Lenders glance at that figure to spot risk, appraisers lean on it to justify value, and brokers headline it to spark bidding.

Cap rate shifts with regional demand, property age, rent growth outlook, and even zoning whispers, turning it into a marketplace thermometer rather than a paycheck predictor.

By contrast, cash-on-cash return zooms in on investor equity.

Divide annual pre-tax cash flow by the euros that left your bank account at closing after loan proceeds. Suppose the same building throws off €45,000 a year after debt service and you invested €300,000. Your cash-on-cash stands at 15%.

That number answers the dinner-table question, “How hard is my money working right now?” It dances with leverage, interest rate, capital calls, and even a new laundry lease, making it the most personal of metrics.

To see the difference in action, scan three growing Sun Belt markets as of mid-2025:

Market	Typical Cap Rate - Class B, 50+ units	Typical Cash-on-Cash Year 1 - 75% LTV, interest-only
Phoenix, AZ	6.0%	8.5%
Dallas, TX	6.2%	9.0%
Orlando, FL	5.8%	7.4%

This short data slice reveals that Phoenix and Dallas post almost identical cap rates, yet Dallas edges ahead on cash-on-cash thanks to lower taxes and stronger rent collections. Orlando, burdened with higher insurance premiums, lags on both counts.

Quick Reference List

• Cap rate summarises building performance before financing. Good for: 1.Benchmarking price against recent trades. 2.Stress-testing NOI projections during underwriting. 3.Negotiating with lenders who rely on DSCR tied to NOI.

• Cash-on-cash focuses on equity performance. Good for: 1.Comparing a multifamily deal to dividend stocks or private credit. 2.Setting distribution targets for limited partners. 3.Flagging refinance timing; dropping return often signals trapped equity.

Notice that cap rate ignores leverage altogether.

A class-C building bought at a lofty 8.5% cap can still disappoint if aggressive debt wipes out operating cash. Meanwhile a trophy asset closing at 5.2% can shine when bought with fixed-rate agency paper and a long interest-only period. Cap rate is silent on these structural decisions, but cash-on-cash shouts.

Interest-rate swings since 2022 offer a vivid lesson.

Rising Treasury yields pushed many bridge loans north of 8% by early 2024.

Cap rates moved far less, compressed by global capital chasing hard assets. The spread between the two metrics narrowed, knocking year-one cash-on-cash from double digits into mid-single digits on deals that closed only twelve months earlier. Sponsors who underwrote to static cap rates learned that high leverage can slice equity checks during an up-cycle in rates.

Picture two actual closings pulled from brokerage records.

• Deal A: 1970s 80-unit in Tulsa, purchased at a 7.8% cap with 65% LTV bank debt. Year-one cash-on-cash came in at 10.2%.

• Deal B: 2015 build in Austin, traded at 5.3% with 60% LTV agency financing and a three-year interest-only period. In spite of the lower cap, Deal B handed investors a 12.6% cash-on-cash figure owing to stable expenses and a lighter debt schedule. The lesson: leverage terms and operating efficiency can outrank headline cap rate when your metric is net cash back to investors.

Choose the right lens for the question at hand.

Cap rate speaks first when valuing an acquisition or gauging market sentiment. Cash-on-cash speaks loudest once you have skin in the game and need to confirm that distributions match promises. Veterans track both side by side, tweaking financing, renovation pace, and exit timing until the pair aligns with strategy. Keep them in balance and your next multifamily deal stands a far stronger chance of rewarding both you and your partners.

Credit: (CBRE, Colliers, The Wall Street Journal, MMG Real Estate Advisors)

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