Real estate investing uses several different return metrics, each answering a different question. Cap rate measures the property's earning power. Cash-on-cash return measures your leveraged return. Total ROI captures the full picture including appreciation and equity buildup.

Step 1: Net Operating Income (NOI)

Formula — Net Operating Income
NOI = Gross Rental Income − Operating Expenses

Operating expenses include property taxes, insurance, maintenance, property management (8-10%), vacancy allowance (5-8%), and repairs. Do NOT include mortgage payments.

Example: A duplex generates $2,400/month in rent ($28,800/year). Operating expenses total $10,800/year. NOI = $28,800 - $10,800 = $18,000.

Step 2: Cap Rate

Formula — Capitalization Rate
Cap Rate = NOI / Purchase Price × 100

Cap rate is independent of financing — it measures the property's intrinsic return.

For the duplex purchased at $300,000: Cap Rate = $18,000 / $300,000 = 6.0%. Use the Cap Rate Calculator for a full deal analysis.

Step 3: Cash-on-Cash Return

Cash-on-cash measures the leveraged return on your actual cash invested. If you put 20% down ($60,000) plus $5,000 in closing costs ($65,000 total cash), and annual mortgage payments are $14,400:

Annual Cash Flow = $18,000 NOI - $14,400 debt service = $3,600. CoC = $3,600 / $65,000 = 5.5%.

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Key Takeaways

  • Cap rate measures the property, not your investment — it ignores financing.
  • Cash-on-cash measures your leveraged return on actual cash invested.
  • Total ROI includes appreciation, equity buildup, tax benefits, and cash flow combined.
  • Leverage amplifies returns — a 6% cap rate can produce 15%+ total ROI with good financing.