Cap Rate vs Cash-on-Cash vs IRR, and What Each Measures
Stockton Farnsworth, Utah Associate Broker · Team Utah Commercial, brokered by RE/MAX Associates
October 19, 2026 · 5 min read
Owners and investors toss around three return numbers: cap rate, cash-on-cash and IRR. They sound like three ways of saying the same thing. They are not. Each one answers a different question, and using the wrong one can lead you to a bad decision about whether to sell, refinance or hold.
Here is what each measures, how to calculate it, and when you should care, using one hypothetical building all the way through.
The short version
| Metric | Question it answers | Includes your loan? | Includes the sale? |
|---|---|---|---|
| Cap rate | What does the building earn compared with its price? | No | No |
| Cash-on-cash | What cash do I get each year on the cash I put in? | Yes | No |
| IRR | What is my total yearly return over the whole time I own it? | Yes, if you model it | Yes |
Cap rate: the building's yield
The cap rate is net operating income (NOI) divided by price or value. Investopedia describes it as a way to compare the relative value of similar properties. It ignores financing on purpose, so it describes the building rather than the buyer.
When an owner should care: whenever the question is "what is my building worth?" Buyers price income property largely by NOI and the cap rate the market supports for that type of building. If you are thinking about selling, this is the number that matters most. Our step-by-step guide on how to calculate cap rate covers how to get NOI right, which is where most errors happen.
What it misses: your loan, your tax situation, future rent growth and what you might sell for later. It is one year's snapshot.
Cash-on-cash: your yearly cash yield
Cash-on-cash return is the yearly pre-tax cash flow, after loan payments, divided by the total cash you invested. Investopedia's cash-on-cash guide gives the formula as annual pre-tax cash flow over total cash invested.
When an owner should care: when you are deciding how much to borrow, comparing a property with other places your cash could sit, or judging whether a refinance makes sense. It is the number that tells you what lands in your bank account each year compared with what you put in.
What it misses: the sale. It also ignores principal paydown on your loan, which is real wealth building even though it is not cash in hand. And because it depends on leverage, two buyers can see very different cash-on-cash returns on the same building.
IRR: the whole-life return
The internal rate of return is the yearly rate that makes the present value of all your cash flows, in and out, equal zero. Investopedia's IRR page and the Corporate Finance Institute both explain it in terms of net present value. In plain English, it captures the cash you put in, the cash you get each year, the money you net when you sell, and when each of those happens.
When an owner should care: when you are comparing options over time. Hold five more years or sell now and buy something else? Spend money on a renovation that raises rents later? IRR is built for those questions because timing counts. A dollar today is worth more than a dollar in year five.
What it misses: IRR is only as good as its assumptions, and the biggest one is the future sale price, which nobody knows. Small changes to that guess can swing IRR a lot. It also does not tell you how much money you made in total, only the rate.
One hypothetical building, three answers
Example: These numbers are invented to show the math. They are not market data and do not describe any real property or deal.
Say a buyer pays $1,400,000 for a small industrial building with $96,000 of NOI.
Cap rate:
- $96,000 / $1,400,000 = 6.86%
Cash-on-cash: The buyer puts $490,000 down and spends $20,000 on closing costs, so $510,000 in cash. The example loan payments total $70,000 a year.
- Cash flow after loan payments: $96,000 - $70,000 = $26,000
- $26,000 / $510,000 = 5.1%
IRR: Now add assumptions for a five-year hold. All of these are made up for the example:
| Year | Example cash flow |
|---|---|
| 0 (purchase) | -$510,000 |
| 1 | $26,000 |
| 2 | $27,000 |
| 3 | $28,000 |
| 4 | $29,000 |
| 5 | $30,000 + $670,000 net from sale after paying off the loan |
With those cash flows, the IRR works out to roughly 10.5% a year.
Same building, three very different percentages. None of them is wrong. They just answer different questions. The cap rate says what the building yields. Cash-on-cash says what the owner's cash earns each year with this loan. IRR says what the whole investment returned, if the sale assumption comes true.
The question most long-time owners never ask
If you bought your building years ago, your cash-on-cash on your original investment might look excellent. But that compares today's cash flow with money you put in long ago.
A more useful question is: what is my return on the equity I have today? Take your building's current likely value, subtract what you owe, and that is your equity. Then compare your yearly cash flow with that number.
Example: An owner put $200,000 into a building years ago and now nets $60,000 a year after loan payments. On the original $200,000, that is a 30% cash-on-cash return. But if the building is now worth $1,500,000 and the loan balance is $300,000, the owner has $1,200,000 of equity, and $60,000 is a 5% return on it. (Example numbers only.)
That does not mean the owner should sell. It means the decision deserves real numbers, starting with a current value. Taxes on a sale matter a great deal here, and that is a conversation for your CPA.
Which one should you use?
- Thinking about selling, or curious what your building is worth? Start with NOI and cap rate. You can run the math in our cap rate calculator.
- Buying, borrowing or refinancing? Look at cash-on-cash alongside the cap rate, so you can see how the loan changes your yearly cash.
- Comparing hold versus sell, or weighing a big improvement? Use IRR, and test a few different sale assumptions rather than trusting one.
Most serious decisions use all three. If someone shows you only one of them, ask for the other two.
Get a real number on your building
This article is general education, not legal, tax or investment advice. Every one of these metrics starts with a realistic value for your property. For a free broker opinion of value, call or text 801-664-3370. It is not an appraisal. It is a licensed broker's view of likely price, based on your income, leases and the current market.
Stockton Farnsworth, Utah Associate Broker, Team Utah Commercial, brokered by RE/MAX Associates.
General education only, not legal, tax, investment or appraisal advice. Information is believed reliable but not guaranteed. Written by Stockton Farnsworth, Utah Associate Broker, Team Utah Commercial, brokered by RE/MAX Associates.
