Cap Rate vs Cash-on-Cash Leveraged
Cap rate measures unleveraged property yield. Cash-on-cash includes mortgage leverage. Leveraged CoC can be 2-3× cap rate but adds default risk.
| Purchase price | — |
| NOI | — |
| Loan | — |
| Monthly P&I | — |
| Annual debt service | — |
| Annual cash flow | — |
| Cash invested | — |
| Cap rate | — |
| Cash-on-cash leveraged | — |
Cap rate (NOI ÷ purchase price) measures unleveraged property yield. Cash-on-cash return (annual cash flow after mortgage ÷ cash invested) measures leveraged investor return. Leverage amplifies both gains and losses.
Cap Rate is Market-Driven
Cap rates reflect market risk pricing. Class A urban 4-6%. Class B suburban 6-8%. Class C 8-12%. Tertiary 10-15%. Lower cap = higher property quality + lower yield.
Cash-on-Cash Math
Cash-on-cash = (NOI - debt service) / cash invested. At 25% down, 75% LTV, cap rate 7%, mortgage 7%: CoC roughly = (cap rate - (LTV × rate)) / (1 - LTV).
Leverage Multiplier
Leverage multiplier = CoC / cap rate. At 25% down, multiplier typically 1.5-3×. Higher leverage = higher multiplier + higher fragility. Above 80% LTV = unstable in market downturns.
Cap Rate vs Mortgage Rate Spread
Positive leverage when cap rate > mortgage rate. Below = NEGATIVE leverage (cash flow falls behind debt service). Today's 7-8% mortgages + 6-8% cap rates = thin or negative spreads.
Last updated May 2026. Sources: BiggerPockets Guide, Federal Reserve Cap Rate Index.