Cap rate is a property's net operating income divided by its price, with no loan in the picture. Cash-on-cash return is the cash left after the mortgage payment, divided by the cash you put in. A mortgage lifts cash-on-cash above the cap rate only when its mortgage constant (a year of payments divided by the loan amount) is lower than the property's yield. At the 7.24% average 30-year rate Freddie Mac published on October 29, 2026, the constant is 8.18%, so on a rental bought at a 6.3% cap rate, financing cuts the cash yield instead of raising it.
The rest of this page works one rental through both ratios: all cash, then with 20% to 40% down at seven mortgage rates. A second rental shows the opposite result, and a table of mortgage constants tells you where the line sits for any rate and term. Every property figure here is a labelled illustration, not market data, and none of it is investment advice.
Two ratios, two different jobs
The two numbers share a numerator in spirit, income from the property, but they divide by different things and they treat the loan in opposite ways.
| Cap rate | Cash-on-cash return | |
|---|---|---|
| Formula | Net operating income ÷ purchase price (or current value) | Annual pre-tax cash flow ÷ total cash invested |
| Numerator | NOI: rent collected minus operating expenses | NOI minus a year of mortgage payments (principal and interest) |
| Denominator | The whole property | Only your cash: down payment plus closing costs and any upfront repairs |
| Effect of the loan | None. Same answer for a cash buyer and a borrower | Everything. The rate, term and down payment all move it |
| What it is good for | Comparing properties, and judging price against income | Judging what your own dollars earn in year one |
| What it leaves out | Financing, closing costs, taxes, appreciation | Principal paydown, appreciation, taxes, and every year after the first |
Neither one is "the return." Cap rate tells you how much income the building throws off per dollar of price, which is why two buyers with different loans can agree on it. Cash-on-cash tells you what one particular buyer, with one particular loan, keeps in their pocket in the first year. When people ask which matters more, the honest answer is that you need cap rate to decide whether the property is priced sensibly and cash-on-cash to decide whether your financing makes it worth owning.
The most common error is mixing the two denominators. A seller's listing that says "8% return" may be a cap rate on the asking price, a cash-on-cash figure that assumes a large down payment, or a gross yield before expenses. Ask which.
Rental A: building net operating income line by line
Here is the first illustration: a single-family rental priced at $400,000. The rent, expenses and closing costs are round assumptions chosen to look like a plausible suburban rental, not quotes from any market. Swap in your own figures; the method does not change.
| Rental A (illustration) | Annual amount |
|---|---|
| Gross scheduled rent ($3,400 a month) | $40,800 |
| Vacancy and unpaid rent allowance (5%) | −$2,040 |
| Effective gross income | $38,760 |
| Property tax | −$4,400 |
| Insurance | −$2,200 |
| Repairs and maintenance | −$2,400 |
| Property management (8% of collected rent) | −$3,101 |
| Capital reserve (roof, HVAC, appliances) | −$1,600 |
| Total operating expenses | −$13,701 |
| Net operating income | $25,059 |
Cap rate: $25,059 ÷ $400,000 = 6.26%.
Three choices in that table change the cap rate more than people expect.
- The vacancy line. Five percent is about 18 days empty a year. A turnover with cleaning and a month of marketing uses that up in one move-out.
- The management line. Self-managing owners often leave it out, which pushes the cap rate up by about 0.8 points here. That is a real saving only if your own time is free.
- The capital reserve. Some analysts put replacements "below the line," after NOI, which flatters the cap rate. Leaving them out entirely makes the property look better than it will be in year eight, when the furnace fails.
What NOI never includes: mortgage principal or interest, depreciation, and income tax. Those belong to the owner, not the building, and that is the reason a cap rate can be compared across buyers.
Paying all cash: why the cash yield starts below the cap rate
A cash buyer has no mortgage, so you might expect cash-on-cash to equal the cap rate. It does not, because the cash buyer also pays closing costs, and those sit in the denominator.
With an assumed $8,000 in closing costs (2% of price), total cash in is $408,000.
All-cash cash-on-cash return: $25,059 ÷ $408,000 = 6.14%.
That 6.14% is the more useful threshold for everything that follows. Call it the all-in yield: what the property earns on every dollar it takes to own it, before any loan. The listing's cap rate of 6.26% is about 0.12 points higher only because it ignores the cost of buying. On a property that needs a $15,000 roof before the first tenant moves in, the gap is wider, and the roof belongs in the denominator too.
The same house with a mortgage: seven rates, four down payments
Now finance Rental A with a 30-year fixed loan. The rates run from 5.50% to 8.00%. Only one of them is a published figure: 7.24% is Freddie Mac's Primary Mortgage Market Survey average for the week of October 29, 2026. The others are illustrations. Freddie Mac describes the PMMS borrower profile as good or excellent credit, 20% down, buying an owner-occupied one-unit home. A loan on a rental is a different product, so a rate quote for one can come in above that average. Treat the 7.50% and 8.00% rows as the more realistic ones for an investor.
Cash-on-cash return, Rental A, 30-year fixed, $8,000 closing costs
| Mortgage rate | 20% down ($88,000 in) | 25% down ($108,000 in) | 30% down ($128,000 in) | 40% down ($168,000 in) |
|---|---|---|---|---|
| All cash, for comparison | 6.14% | 6.14% | 6.14% | 6.14% |
| 5.50% | 3.70% | 4.28% | 4.67% | 5.18% |
| 6.00% | 2.31% | 3.22% | 3.84% | 4.64% |
| 6.50% | 0.90% | 2.13% | 2.99% | 4.08% |
| 7.00% | −0.56% | 1.03% | 2.11% | 3.51% |
| 7.24% (PMMS, Oct 29, 2026) | −1.26% | 0.49% | 1.69% | 3.23% |
| 7.50% | −2.03% | −0.10% | 1.22% | 2.93% |
| 8.00% | −3.54% | −1.26% | 0.32% | 2.34% |
Every financed cell is below 6.14%. At no rate in this range does the mortgage improve the cash yield on Rental A, and at 7.00% and above, a 20% down payment produces a property that costs money each month to hold.
The 25% column in dollars shows where the money goes. Year-one principal is the part of the payment that reduces the loan balance; it leaves your account, but it is not an expense.
| Rate (25% down, $300,000 loan) | Annual payments | Cash flow after payments | Cash-on-cash | NOI ÷ payments (DSCR) | Year-one principal repaid |
|---|---|---|---|---|---|
| 5.50% | $20,440 | $4,619 | 4.28% | 1.23 | $4,041 |
| 6.00% | $21,584 | $3,475 | 3.22% | 1.16 | $3,684 |
| 6.50% | $22,754 | $2,305 | 2.13% | 1.10 | $3,353 |
| 7.00% | $23,951 | $1,108 | 1.03% | 1.05 | $3,047 |
| 7.24% | $24,534 | $525 | 0.49% | 1.02 | $2,909 |
| 7.50% | $25,172 | −$113 | −0.10% | 1.00 | $2,766 |
| 8.00% | $26,416 | −$1,356 | −1.26% | 0.95 | $2,506 |
The DSCR column (debt service coverage ratio, NOI divided by a year of payments) is the number a lender looks at for a rental. At 7.24% it is 1.02: the property covers its mortgage with $525 a year to spare, which one water heater erases. Lenders set their own minimum coverage, so a ratio near 1.0 can also mean the loan is not approved at all at that size.
The mortgage constant: the number that decides the sign
Why does the loan hurt Rental A at every rate in the table? Because what matters is not the interest rate alone but the full annual payment as a share of the loan. That share is the mortgage constant:
Mortgage constant = 12 × monthly principal-and-interest payment ÷ loan amount
At 7.24% over 30 years, the monthly payment per $100,000 borrowed is $681.50, so the constant is 12 × 681.50 ÷ 100,000 = 8.18%. Every borrowed dollar costs 8.18 cents a year in payments.
Now the rule. Write the all-in yield as y (NOI divided by price plus closing costs), the constant as K, and the loan as L. Cash flow is NOI minus K × L, and your cash in is the total cost minus L. A few lines of algebra show that cash-on-cash is above y exactly when K is below y, whatever the down payment. Each borrowed dollar earns y and costs K. If it costs more than it earns, every extra dollar borrowed drags the return down.
That is the definition used in this guide:
- Positive leverage: mortgage constant below the all-in yield. Cash-on-cash rises above the all-cash figure, and more borrowing lifts it further.
- Negative leverage: mortgage constant above the all-in yield. Cash-on-cash falls below the all-cash figure, and more borrowing pushes it lower, eventually below zero.
- Neutral: the two are equal, and cash-on-cash is the same at every down payment.
Mortgage constants by rate and term (annual payments as a percentage of the loan)
| Interest rate | 30-year | 25-year | 20-year | 15-year | Interest-only |
|---|---|---|---|---|---|
| 4.00% | 5.73% | 6.33% | 7.27% | 8.88% | 4.00% |
| 4.50% | 6.08% | 6.67% | 7.59% | 9.18% | 4.50% |
| 5.00% | 6.44% | 7.02% | 7.92% | 9.49% | 5.00% |
| 5.50% | 6.81% | 7.37% | 8.25% | 9.81% | 5.50% |
| 6.00% | 7.19% | 7.73% | 8.60% | 10.13% | 6.00% |
| 6.50% | 7.58% | 8.10% | 8.95% | 10.45% | 6.50% |
| 7.00% | 7.98% | 8.48% | 9.30% | 10.79% | 7.00% |
| 7.24% | 8.18% | 8.67% | 9.48% | 10.95% | 7.24% |
| 7.50% | 8.39% | 8.87% | 9.67% | 11.12% | 7.50% |
| 8.00% | 8.81% | 9.26% | 10.04% | 11.47% | 8.00% |
| 8.50% | 9.23% | 9.66% | 10.41% | 11.82% | 8.50% |
| 9.00% | 9.66% | 10.07% | 10.80% | 12.17% | 9.00% |
How to read it: find your rate and term, and the cell is the all-in yield the property must beat for the loan to raise your cash-on-cash. At 7.24% on a 30-year loan, that is 8.18%. On a 15-year loan at the same rate, the property would need 10.95%, which almost no ordinary rental produces, so a 15-year mortgage nearly always means negative cash leverage even though it saves interest.
Turning it around gives the break-even rate for Rental A, the rate at which its 6.14% all-in yield equals the constant:
| Loan term | Break-even rate for Rental A (6.14% all-in yield) | Break-even if you used the 6.26% cap rate instead |
|---|---|---|
| 30-year | 4.59% | 4.76% |
| 25-year | 3.71% | 3.90% |
| 20-year | 2.13% | 2.34% |
| 15-year | None: even at 0%, the constant is 6.67% | None |
| Interest-only | 6.14% | 6.26% |
Two lessons sit in that table. First, using the listing cap rate rather than the all-in yield moves the break-even by roughly 0.2 points, enough to call a deal positive when it is not. Second, the 15-year row: a zero-interest 15-year loan still requires 1/15 of the balance each year, 6.67%, which exceeds Rental A's yield. Principal repayment alone can make leverage negative on a cash basis.
Why a bigger down payment raises the return when leverage is negative
Most investing advice says borrowing magnifies returns. The Rental A table shows the reverse: at every rate, the 40% column beats the 20% column. Under negative leverage, each dollar you replace with a borrowed dollar earns 6.14% and costs more than that, so putting more of your own money in and borrowing less raises the yield on your cash.
The magnifying effect is still there. It just works in both directions, and the downside shows up as soon as something goes wrong. Suppose Rental A sits empty for two extra months in year one, losing $6,800 of rent beyond the 5% allowance. At 7.24%:
| Rental A at 7.24%, two extra vacant months | Cash flow | Cash-on-cash |
|---|---|---|
| All cash ($408,000 in) | $18,259 | 4.48% |
| 40% down | −$1,368 | −0.81% |
| 30% down | −$4,639 | −3.62% |
| 25% down | −$6,275 | −5.81% |
| 20% down | −$7,910 | −8.99% |
The cash buyer's yield drops from 6.14% to 4.48% and stays positive. The 20%-down buyer writes cheques totalling $7,910 that year. That is the practical meaning of negative leverage: a thinner cushion and a worse return at the same time. The cash-on-cash stress calculator runs this kind of vacancy and rate shock on your own inputs.
Rental B: a property where the loan earns its keep
Negative leverage is not a law of nature. It is the result of buying at a low cap rate while borrowing at a high constant. Rental B is the second illustration: a $200,000 house, $2,600 a month in rent, a higher 6% vacancy allowance and 9% management, as you might assume for an older house in a lower-priced market.
| Rental B (illustration) | Annual amount |
|---|---|
| Gross scheduled rent ($2,600 a month) | $31,200 |
| Vacancy allowance (6%) | −$1,872 |
| Property tax, insurance, repairs | −$7,100 |
| Management (9%) and capital reserve | −$4,140 |
| Net operating income | $18,088 |
| Cap rate on $200,000 | 9.04% |
| All-in yield with $5,000 closing costs | 8.82% |
Its break-even rate on a 30-year loan is 8.02%. Below that, the loan helps:
| Mortgage rate | 20% down | 25% down | 30% down | 40% down |
|---|---|---|---|---|
| All cash | 8.82% | 8.82% | 8.82% | 8.82% |
| 5.50% | 15.97% | 14.31% | 13.15% | 11.66% |
| 6.50% | 13.23% | 12.20% | 11.49% | 10.57% |
| 7.24% (PMMS) | 11.12% | 10.58% | 10.21% | 9.74% |
| 7.50% | 10.36% | 10.00% | 9.76% | 9.44% |
| 8.00% | 8.89% | 8.87% | 8.86% | 8.85% |
Now the columns run the other way: the smaller the down payment, the higher the return. And look at the 8.00% row. It is within a hair of the break-even rate, so cash-on-cash is about 8.9% whether you put down 20% or 40%. That flat row is the mortgage-constant rule made visible.
Positive leverage also absorbs a shock better. With the same two extra vacant months (here $5,200 of lost rent) at 7.24%, the 25%-down buyer of Rental B still clears $622 for the year, and only the 20%-down buyer dips slightly negative, at −$196. Its DSCR at 25% down is 1.47 against Rental A's 1.02.
Rental B is not automatically the better purchase. Higher cap rates usually come with something the buyer is being paid to accept: older systems, slower rent growth, a thinner tenant pool or more turnover. The 9% cap rate is compensation for those risks, not free money. What the comparison shows is narrower: the loan's effect on your cash yield depends on the gap between the property's yield and the mortgage constant, and nothing else.
Principal paydown: the part cash-on-cash leaves out
Cash-on-cash counts the whole mortgage payment as money gone. It is not all gone. In year one on Rental A at 7.24% with 25% down, $2,909 of the $24,534 in payments reduced the loan, and that is equity you would recover on a sale or refinance. Add it back and the year-one return on cash rises from 0.49% to 3.18%.
On that wider basis, cash flow plus principal repaid, the test changes. Cash flow plus principal equals NOI minus the interest paid, so the loan helps once its interest rate falls below the all-in yield, and the amortization part of the constant drops out. For Rental A the crossover is a 6.18% rate in year one, at every down payment. At 7.24% the loan is still negative on this basis, but by a much smaller margin than the cash-flow figures suggest.
So there are two thresholds, and you should know which one you are using:
| Question you are asking | Compare the all-in yield with | Rental A threshold (30-year) |
|---|---|---|
| Will the loan raise my spendable cash flow? | The mortgage constant | 4.59% rate |
| Will the loan raise my cash flow plus equity built? | The interest rate | About 6.18% rate |
Neither one includes appreciation. If rents and values rise, both ratios improve in later years while the payment on a fixed-rate loan stays the same, which is the main reason investors accept a thin first year. That is a forecast, though, and this page does not make one. If you want to count appreciation, the rental ROI calculator takes an appreciation assumption and shows total return beside cash-on-cash, so you can see how much of the answer depends on that guess.
Where mortgage rates have been, measured against these thresholds
The constant tracks the rate, so the PMMS history gives a quick sense of how often a 6% to 9% cap rate rental would have had positive cash leverage. These are the published weekly 30-year averages from Freddie Mac's PMMS history file, checked October 30, 2026, converted to constants with the formula above.
| PMMS week | 30-year average | 30-year constant | Cap rate needed for positive cash leverage (all-in) |
|---|---|---|---|
| January 7, 2021 (lowest in the series, which starts in 1971) | 2.65% | 4.84% | Above 4.84% |
| October 26, 2023 (2023 high) | 7.79% | 8.63% | Above 8.63% |
| October 30, 2025 (one year ago) | 6.17% | 7.33% | Above 7.33% |
| February 26, 2026 (2026 low to date) | 5.98% | 7.18% | Above 7.18% |
| October 8, 2026 (2026 high to date) | 7.40% | 8.31% | Above 8.31% |
| October 29, 2026 (latest) | 7.24% | 8.18% | Above 8.18% |
In early 2021, Rental A's 6.14% yield would have cleared the constant by about 1.3 points: financed with 20% down at 2.65%, it would have returned 10.89% cash-on-cash against 6.14% all cash. That experience is behind much of the rule-of-thumb advice still in circulation. At today's average it would need an 8.18% all-in yield, before any extra pricing a lender adds for a rental. The 15-year average on October 29 was 6.60%, a 10.52% constant.
Remember that these are owner-occupied averages. If your rental loan is quoted half a point higher, move down the constant table accordingly; at 7.74% the 30-year constant is about 8.6%.
What neither ratio sees
Both ratios are first-year, pre-tax snapshots. A few things can change the conclusion:
Income tax. Neither formula includes it. Under IRS Publication 527 (2025 edition, checked October 30, 2026), you can deduct mortgage interest on a rental property, and residential rental buildings are depreciated over 27.5 years under the general depreciation system, while land cannot be depreciated at all. Depreciation is a non-cash deduction, so it can make taxable rental income lower than the cash flow in the tables above. How much that helps depends on your bracket and on passive-activity limits, which is a question for a tax professional, not a ratio.
Loan costs. Points and lender fees add to your cash in and lower cash-on-cash, but they can buy a lower rate and therefore a lower constant. The mortgage points calculator shows the break-even month for that trade, and the APR vs APY guide explains why a loan's APR moves with fees and term.
Interest-only and adjustable loans. An interest-only period sets the constant equal to the rate, 7.24% instead of 8.18% at today's average, which can flip a marginal deal to positive cash leverage for a few years. The constant jumps when amortization starts, and on an adjustable loan it can move with the index. Run the table at the fully amortizing payment, not just the teaser.
Price versus value. Cap rate on purchase price and cap rate on today's value differ once the property has appreciated. An owner who bought Rental A years ago at $300,000 earns 8.35% on their original price, but the property is still only yielding 6.26% on what it would sell for. The second number is the one to compare with selling and investing elsewhere.
The alternative. A 0.49% cash yield on $108,000 is worth comparing with what that money would earn with no landlord work. The REIT vs direct real estate calculator sets owning a rental beside a listed real estate fund, and the 1031 exchange calculator covers the tax side of swapping one rental for another.
Running the comparison on a listing
Five steps, in this order, catch most of the mistakes above:
- Rebuild NOI yourself from rent, vacancy, taxes, insurance, repairs, management and a capital reserve. Do not accept a listing's NOI that leaves out management or reserves. The cap rate calculator does this from line items.
- Divide NOI by price plus closing costs plus any upfront repairs. That is your all-in yield, the threshold for everything else.
- Get a real rate quote for an investment property loan, and look up its constant in the table, or compute it with the mortgage payment calculator (12 times the monthly payment, divided by the loan).
- Compare. If the constant is higher than the all-in yield, more down payment raises your cash return and a smaller one lowers it, and you should decide whether the equity build and any expected appreciation justify a thin first year.
- Stress it: two empty months, a 10% rise in insurance and taxes, and a major repair. If the 25%-down case turns negative under any one of those, the deal is relying on things going right.
If the cap rate is 6% and the best rental loan you can get is 7.5%, the arithmetic is settled before you visit the property: financing will lower your cash yield, and the case for buying has to rest on something other than year-one cash flow. For more housing math, including PMI and mortgage payment tools, see the homeowner calculators hub, and browse the rest of the investment calculators for returns on other assets.
How the figures were produced
Rentals A and B are invented illustrations with stated inputs; they do not describe any real property or market, and their rents, taxes and expenses are assumptions. Payments are standard fully amortizing monthly payments on a fixed-rate loan; year-one principal is the sum of the first 12 months of principal. Cash-on-cash uses down payment plus closing costs as cash invested. All percentages were computed with a script and rounded to two decimals, and dollar amounts to the nearest dollar. This page explains how the ratios work. It is not investment, tax or lending advice, and no rate shown here is a quote.
Sources
- Freddie Mac, Primary Mortgage Market Survey: 30-year fixed 7.24% and 15-year fixed 6.60% for the week of October 29, 2026; year-ago 30-year average 6.17%; PMMS borrower profile and Loan Product Advisor data source. Checked October 30, 2026.
- Freddie Mac, PMMS historical data file: weekly 30-year averages since April 2, 1971, used for the history table. Checked October 30, 2026.
- Internal Revenue Service, Publication 527 (2025), Residential Rental Property: deductibility of rental mortgage interest, 27.5-year recovery period for residential rental property, and land not depreciable. Checked October 30, 2026.