Cash-on-Cash vs Cap Rate vs DSCR: Pick the Right Number for the Right Conversation
Short answer: Cap rate (NOI ÷ price) measures the unlevered asset and is best for comparing properties. Cash-on-cash (year-1 cash flow ÷ cash invested) measures your levered return and is what equity partners care about. DSCR (NOI ÷ debt service) is the lender's coverage test. Lead with the metric that fits your audience.
Cap rate, cash-on-cash, and DSCR all measure the same property. They tell three different stories.
What does cap rate tell you?
Cap rate (NOI / price) tells you what the asset earns unlevered. It's the right number for comparing two properties to each other, or comparing this property to a market index. It's the wrong number for comparing two financing structures.
Cash-on-cash — the equity check's story
Cash-on-cash (year-1 cash flow / cash invested) is the only metric that includes the loan. If you put $300,000 down and the property throws off $24,000 of cash flow after debt service, you're at 8% CoC. That's the number that matters to the equity partner, because it's the check on their wire.
DSCR — the lender's story
DSCR (NOI / debt service) is the lender's view of the world. It exists to answer one question: if a tenant moves out, can the borrower still pay the note? Above 1.25 is comfortable. Below 1.10 is a refi risk in a rate spike.
Which metric should you lead with?
- Pitching to a seller? Cap rate, because that's how they see their property.
- Pitching to your spouse / equity partner? Cash-on-cash, because that's the bank deposit they care about.
- Pitching to your lender? DSCR, because that's the box they have to check.
The mistake is leading with cap rate to a lender ("but it's a 7-cap!") or leading with DSCR to an investor ("we're at 1.40 coverage!"). Use each metric in the conversation it's designed for.
PathIQ shows all three on the deal summary, side by side, so you can pull whichever number the next meeting needs.
Frequently asked questions
What is the difference between cap rate and cash-on-cash return?
Cap rate is NOI divided by purchase price and ignores financing — it measures the unlevered asset. Cash-on-cash is year-1 cash flow after debt service divided by the cash you invested, so it includes the loan. Cap rate compares properties; cash-on-cash measures your actual return on equity.
Which metric do lenders care about most?
DSCR. Lenders use debt service coverage — NOI divided by annual debt service — to confirm the property can still pay its note if a tenant moves out. Above 1.25 is comfortable; below 1.10 becomes a refinance risk if rates spike.
Can two properties have the same cap rate but different cash-on-cash returns?
Yes. Cap rate is independent of financing, so two properties with identical cap rates can produce very different cash-on-cash returns depending on the loan terms, leverage, and down payment. That's why you compare assets on cap rate but evaluate your own return on cash-on-cash.
What does a good DSCR look like?
A DSCR of 1.0 means rent exactly covers the payment. Most lenders want at least 1.25 on small multifamily, and conventional investor loans often target around that level. Above 1.25 is comfortable coverage; below 1.10 leaves little margin for vacancy or expense surprises.
Should I use cap rate or cash-on-cash when pitching an equity partner?
Lead with cash-on-cash. It's the number that reflects the return on the check your partner actually wires. Cap rate is better saved for comparing the asset to other properties or a market index, and DSCR is for the lender conversation.