August 21, 2026
Cap rate is not your return
It is a price, quoted as a percentage. Treating it as a yield is the most common mistake in a first rental purchase.
Priya Raman
August 21, 2026 · 1 min read
Cap rate is the first number most people learn and the one most people misread. It is worth being exact about, because the mistake costs money.
What it actually is
Net operating income divided by purchase price. Nothing in it is about you: not your loan, not your down payment, not your tax position.
That is the whole point of it. Cap rate is how the market prices a stream of income, which makes it useful for exactly one thing — comparing two properties to each other, or one property to the neighborhood it sits in.
What it is not
It is not what you will earn. The moment you borrow, your return stops tracking the cap rate and starts tracking the spread between the cap rate and your interest rate.
- Buy at a 7% cap with cash: you earn roughly 7%.
- Buy at a 7% cap with debt at 6%: the borrowed portion earns you the 1% spread, and your return on the cash you put in is higher than 7%.
- Buy at a 6% cap with debt at 7%: every borrowed dollar loses money, and leverage now works against you.
That last case is not rare. It has been the ordinary case in several metros for the past two years.
How to use it
Use cap rate to ask "is this priced like its neighbors?" Use cash on cash to ask "what will this pay me?" Use DSCR to ask "will anybody lend on it?" Three questions, three numbers, and no one of them answers the other two.
