Cap Rate vs. Cash-on-Cash vs. IRR

The cap rate is a property's net operating income divided by its price. A building that nets $550,000 a year and sells for $10 million trades at a 5.5% cap rate. Because the loan is left out, it lets you compare two buildings on equal terms, however each one is financed.

That is also its limit. The cap rate tells you about the asset, not about you. It says nothing about the loan, the equity you put in or what you will actually receive.

Cash-on-cash return is the year's cash distributions divided by the cash you invested. Put in $100,000, receive $6,000 over the year, and your cash-on-cash return was 6%.

Unlike the cap rate, it includes the loan: the cash flow is what is left after the mortgage is paid. It ignores everything that does not land in your account that year: appreciation, the loan being paid down, and the sale.

The internal rate of return rolls every cash flow, from the money you put in through each distribution to your share of the sale, into one yearly rate. Money that comes back sooner counts for more. That makes IRR the most complete single figure, and also the easiest to flatter: a quick sale can show a high IRR on very little profit.

That is why the equity multiple, the total cash you get back divided by the cash you put in, is read beside it. IRR tells you how fast; the multiple tells you how much.

Here is one made-up property run through all three. The numbers are round and simplified for illustration (no closing costs, fees, reserves or selling costs), and they are not a projection for any real property.

• Price: $10,000,000. Net operating income in year 1: $550,000, growing 3% a year.
• Loan: $6,500,000 at 6.0%, interest only, so $390,000 a year in debt payments.
• Equity invested: $3,500,000.
• Sale at the end of year 5, priced at the same 5.5% cap rate on the next year's income.

Three things stand out. The cap rate and year-1 cash-on-cash disagree because of the loan. Cash-on-cash grows each year because the income rises while the interest-only payment stays the same. And most of the IRR comes from the sale, which neither of the other two numbers can see.

Borrowing helps your cash-on-cash return only when the loan costs less than the property earns. In the example, the loan's 6.0% rate is higher than the 5.5% cap rate, so every borrowed dollar costs more than it brings in. Year-1 cash-on-cash comes out at 4.6%, below the 5.5% an all-cash buyer would earn. This is often called negative leverage.

It is not a permanent state. With fixed debt payments and rising income, the same deal's cash-on-cash edges past the cap rate in year 3 (5.53%). That is why a single year's cash-on-cash figure says little on its own: ask what it is in year 1, how it is expected to change, and what has to happen for it to change.

Two made-up outcomes show why the two are read together. In the first, $1 million becomes $1.25 million in 18 months: an IRR of about 16% and an equity multiple of 1.25x. In the second, $1 million becomes $2 million over five years: an IRR of about 14.9% and a multiple of 2.0x.

The first has the higher IRR. The second makes four times as much money. Neither is better in every case, but you only see the trade-off with both numbers on the page.

There is no single good number. Cap rates move with interest rates, the market and the building's age and condition: a newer property in a strong location usually trades at a lower cap rate than an older one that needs work. A useful check is the local market. In Houston, Matthews reported a multifamily cap rate of 6.28% in Q2 2026; in Dallas-Fort Worth it reported an average of 5.66% in Q3 2026 (more on our Houston and Dallas-Fort Worth market pages).

A cap rate well above its market's usually comes with a reason, such as deferred maintenance, high vacancy or a weaker location. One well below it usually means the buyer is paying for expected rent growth.

In a real estate syndication, a passive investor usually sees all of these in the offering materials. Cash-on-cash tells you what distributions to expect while the property is held. IRR and the equity multiple describe the whole hold, sale included, so they rest on assumptions about rent growth, expenses, interest rates and the cap rate at sale.

Those assumptions deserve more attention than the results. The SEC's investor bulletin on private placements lists questions to ask. One is "Are the claims and expectations reasonable?" Another is "What is the experience and background of management?" It also notes that investors "may need to hold the securities indefinitely." A projected IRR is only as good as the exit it assumes. We underwrite those inputs conservatively, and they are the first thing worth asking any sponsor about.

Related guides: what to ask before joining a syndication, how passive real estate investing works, what net operating income is and apartment classes A, B, C and D explained.