Cap Rate vs. Cash-on-Cash Return vs. DSCR

Cap rate

Capitalization rate divides net operating income by price or value. Because it ignores financing, it lets you compare properties on their own operating merits and compare a property against what similar assets trade for.

Its weakness is that it is only as reliable as the NOI behind it. An optimistic expense assumption inflates the cap rate without changing the property.

Cash-on-cash return

Cash-on-cash divides annual pre-tax cash flow by the total cash you put in — down payment, closing costs and any up-front capital work. It answers a personal question: what is this deal returning on my money this year?

Because it reflects leverage, two investors buying the same property with different financing will get different cash-on-cash results. More leverage can raise the figure while also raising risk.

DSCR

Debt service coverage ratio divides NOI by annual debt service. A ratio above 1.0 means operating income covers the loan payments; below 1.0 means it does not. Lenders offering DSCR-based investment loans set their own minimum thresholds and calculation conventions, which vary by lender and program.

Reading them together

A property can show an acceptable cap rate and still produce weak cash-on-cash under a specific financing structure, or show attractive cash-on-cash while sitting at a thin DSCR that leaves no room for a vacancy. Look at all three, then stress-test the assumptions that drive NOI.

Frequently asked questions

Which metric matters most?

They answer different questions. Cap rate compares properties, cash-on-cash measures your return, and DSCR reflects loan safety and lender requirements.

What is a good cap rate?

There is no universal answer. Cap rates vary by market, property type, condition and time period, and a higher cap rate often reflects higher perceived risk.

Do these include taxes?

Property taxes belong in operating expenses, but none of the three reflects your income tax situation. Consult a tax professional for that.