Real estate investing guide
Cap Rate vs Cash Flow
Two essential metrics that measure different things. Here is what each tells you, when to use it, and how they work together to evaluate a rental property.
The key difference
Cap rate is a property-level metric. It ignores financing and asks: how efficiently does this property generate income relative to its price?
Cash flow is an investor-level metric. It accounts for your specific mortgage and asks: how much money does this property put in my pocket each month?
Same property, same income, same expenses — but two investors with different down payments will have different cash flows and identical cap rates.
Side-by-side comparison
Cap rate
6.0%
Same regardless of financing
Cash flow (25% dn)
+$180/mo
Lower mortgage, better cash flow
Cash flow (10% dn)
−$215/mo
Higher mortgage, negative cash flow
NOI (monthly)
$1,500
Same for both investors
Both investors own the same $300,000 property generating $1,500/mo in NOI. The cap rate is 6% for both. But the investor with 10% down has a much larger mortgage, pushing cash flow negative.
When to use cap rate
- Comparing properties across different price points and markets.
- Evaluating a market's relative value (higher cap rate = cheaper relative to income).
- Analyzing deals for all-cash purchase scenarios.
- Benchmarking against other asset classes (cap rates are similar to bond yields).
When to use cash flow
- Evaluating whether a leveraged deal generates income with your specific financing.
- Determining how much of a mortgage you can sustain on a property.
- Assessing monthly income potential for cash flow — focused investment strategies.
- Modeling the impact of different interest rates or down payments on the same deal.
Cap rate formula
Where:
- Annual NOI
- Gross rent × (1 − vacancy rate) − management − maintenance − CapEx − taxes − insurance
- Purchase Price
- Total acquisition cost of the property
Example:
- Annual NOI = $18,000
- Purchase Price = $300,000
- Step 1: Cap Rate = 18,000 ÷ 300,000
- Step 2: Cap Rate = 0.060 = 6.0%
A 6% cap rate is the same for both investors regardless of how the property is financed — it measures the property, not the deal structure.
Cash flow formula
Where:
- Monthly NOI
- Net operating income per month (income minus all operating expenses, excluding the mortgage)
- Monthly Mortgage Payment
- Principal and interest on the loan (varies by down payment and rate)
Example:
- Monthly NOI = $1,500 (same for both investors)
- Mortgage at 25% down = $1,320/month → Cash Flow = $180/month
- Mortgage at 10% down = $1,715/month → Cash Flow = −$215/month
Same property, same NOI, same cap rate — but the investor with less down payment has a larger mortgage that pushes cash flow negative.
Using both metrics together
A complete deal analysis uses both. Cap rate tells you whether the property is priced reasonably relative to its income. Cash flow tells you whether it works with your financing. A property with a high cap rate but negative cash flow may make sense if you expect rates to fall or rents to rise. A property with strong cash flow but a low cap rate may indicate you are paying a premium for a high-demand market.
Frequently asked questions
- What is cap rate in real estate?
- Cap rate (capitalization rate) equals net operating income divided by purchase price. It measures the unlevered yield of a property — independent of how it is financed. A $300,000 property generating $18,000 in annual NOI has a 6% cap rate.
- What is cash flow in real estate?
- Cash flow is the money left over after paying all expenses including the mortgage. It is specific to your financing — two investors buying the same property with different down payments will have different cash flows but the same cap rate.
- Which metric is more important: cap rate or cash flow?
- Both matter, but for different purposes. Cap rate lets you compare properties across different financing structures and markets. Cash flow tells you the actual monthly income (or loss) you will experience with your specific loan terms.
- Can a property have a high cap rate but negative cash flow?
- Yes, if you put less money down and take on a larger mortgage. The cap rate stays the same, but a bigger loan means a higher payment, which can push cash flow negative. This is common in high-interest-rate environments.
- What is a good cap rate for a rental property?
- Cap rates vary widely by market. High-appreciation markets (coastal cities, Austin, Denver) often trade at 3–5%. Midwest and secondary markets may offer 6–9%. There is no universal "good" cap rate — it depends on your investment thesis and the alternatives available in that market.
See both metrics for your deal
DealPrism calculates cap rate and cash flow side by side, with your specific financing terms.
Analyze your own deal — freeResults are based on user-entered assumptions. Values may vary by property, location, and market conditions. Review all assumptions before making investment decisions.