Rental cash flow, cap rate and cash-on-cash return

Why three numbers instead of one

They answer different questions, and treating them as interchangeable is how people talk themselves into a property.

Cap rate is net operating income divided by price, and it deliberately excludes your mortgage. That is not an oversight — it is the whole point. Two buyers financing the same building differently would otherwise compute different "returns" for an identical property. Cap rate describes the building; your financing describes your deal.

Cash flow is the opposite: it includes the mortgage, because the mortgage is real and due monthly. This is the number that decides whether you can hold the property through a vacancy or a renewal.

Cash-on-cash divides the year's cash flow by the cash you actually put in — here, your down payment. It is the closest of the three to "what am I earning on my money", and it is the most sensitive to leverage, which cuts in both directions.

What this deliberately leaves out

No appreciation, no rent growth, no tax treatment, no capital cost allowance and no credit for the principal portion of your mortgage payment. Every one of those requires a forecast, and multiplying four forecasts together produces confidence rather than accuracy. The investment property guide covers the tax shape and what happens on the way out.

One consequence worth stating plainly: because principal paydown is not counted here, a property showing slightly negative cash flow is not necessarily losing you money in net-worth terms. It is, however, costing you cash every month, and cash is what covers a furnace.