Cap Rate vs IRR vs Cash-on-Cash: Which Number to Trust on a Deal

Cap rate vs IRR vs cash on cash is three answers, not a ranking. Cap rate is a snapshot on price. Wall Street Prep treats the capitalization rate as unlevered: stabilized net operating income divided by current market value, independent of the loan. Cash-on-cash is cash this year (annual levered pre-tax cash flow divided by the equity you actually wrote). IRR needs every dated flow, including the sale. Raziel’s cap rate calculator and IRR calculator run those identities. The real estate investment tracker post is the cash-and-document book. This page is which percentage to read on a deal.

This is not legal, tax, or investment advice. Raziel Holdings, Inc. does not provide it. Read the rent roll, the loan, and the dated cash table.

Cap rate is a snapshot on price

Wall Street Prep: the cap rate (capitalization rate) measures potential yield on a rental while neglecting leverage. Financing does not move it. The formula is Cap Rate (%) = Stabilized NOI ÷ Current Market Value. NOI is rental plus ancillary income, minus direct operating expenses. Current market value is most often the purchase price or asking price. A higher percentage implies a higher potential return, or more downside risk. Comparing an implied cap to prevailing market caps on comparable properties ranks buildings, not checks.

Raziel’s cap rate calculator prints the same identity: Cap Rate (%) = (NOI / Property Value) × 100. The tool’s comparison copy: cap rate is NOI divided by property value, assumes a 100% cash purchase, and is a single-year snapshot that assumes stable operations. Mortgage payments are not in the numerator. Wall Street Prep’s shortcoming is the implicit assumption that one period of economic benefit continues in perpetuity. Cap rate does not see your down payment, amortization, later-year vacancy, or a future sale. It prices the building. It does not score the hold.

Cash-on-cash is cash this year

Wall Street Prep’s cash-on-cash return (cash yield) is annual levered pre-tax cash flow divided by the equity investment on the purchase date. Annual pre-tax cash flow is NOI minus annual debt service (principal amortization plus interest). Unlike cap rate, cash-on-cash moves with the loan. If the debt share of purchase price rises, required equity falls, and cash-on-cash rises, all else equal. That makes peer comparison harder.

Raziel’s cap rate calculator treats cash-on-cash as annual cash flow divided by actual cash invested, including the down payment, and says it accounts for financing. Wall Street Prep’s worked example on that note: NOI of $1.2 million on a $20 million current market value is a 6.0% cap rate. After $800,000 of annual debt service, $400,000 of pre-tax cash flow on $5 million of equity is an 8.0% cash-on-cash return. Same property. Two percentages. The spread is the loan, not a better building.

Cash-on-cash still covers one period. Wall Street Prep contrasts it with return on investment: cash-on-cash is the current period (one year, or twelve months). ROI covers the entire holding period. Sale proceeds, refinancing sweeps, and later-year rent growth sit outside this year’s cash yield. Extra capital expenditure or vacancy can print a weak year even if the hold still works.

IRR needs every dated flow, including the sale

Wall Street Prep defines internal rate of return as the annualized interest rate at which the initial capital must have grown to reach the ending value. Equivalently, it is the discount rate at which net present value of the cash flows equals zero. The two inputs are the size of each inflow or outflow and the coinciding dates. Unlike cap rate or cash-on-cash, IRR is time-weighted. A rent check, a roof, a refinance, and a sale each move the percentage only if they are dated. Omit the sale (or a terminal mark you treat as an inflow) and you do not have an IRR. You have a stub.

Raziel’s IRR calculator uses that same net-present-value-equals-zero definition and notes that IRR accounts for the timing of every dollar in and out. Standard IRR assumes evenly spaced periods. XIRR handles irregular dates. Wall Street Prep prefers Excel XIRR over IRR for the same reason: property cash is not one cell per year. A model that dumps twelve rent checks into Year 1 and withholds the exit is not an IRR of the deal.

Wall Street Prep’s limitation still applies on a rental. IRR is highly sensitive to timing. An early distribution or a short hold can print an impressive percentage while the money multiple stays thin. Pair IRR with a multiple (MOIC or equity multiple) before you trust the headline. Cap rate and cash-on-cash cannot substitute for that pair, because neither one includes the exit.

Which number to trust on a deal

Trust the metric that matches the question.

• Cap rate when you compare buildings on an unlevered yield, independent of who brings the loan.

• Cash-on-cash when you need this year’s cash after debt service on the equity you actually wrote.

• IRR when you score the whole hold: every dated flow through sale (or a mark treated as a terminal inflow).

If a broker packet leads with one of the three and withholds the inputs (NOI, value, debt service, equity in, wire dates, sale), you do not have a return. You have a headline. A workbook that stores those inputs can produce all three without mixing them. A workbook that stores one percentage cannot.

Raziel’s real estate dashboard is the book those rows already sit on (rent, capital expenditure, documents, IRR). Run the snapshot on the cap rate calculator. Run the hold on the IRR calculator. Leave the original cash dates alone so the three views stay honest.