Question 1

What is the difference between cap rate and cash-on-cash return?

Accepted Answer

Cap rate measures the property’s unlevered yield — NOI against the full purchase price, ignoring financing. Cash-on-cash return measures your actual levered return — the cash flow you keep after the mortgage payment, against only the cash you personally put in. The same property can show a modest cap rate but a strong cash-on-cash return if it’s financed well.

Question 2

Why exclude the mortgage from operating expenses but include it in cash flow?

Accepted Answer

NOI (and therefore cap rate) is meant to describe the property itself, independent of how any particular buyer finances it, so mortgage payments are excluded there. Actual monthly cash flow — what lands in your pocket — has to include the mortgage payment, since that’s real cash going out the door.

Question 3

How much should I budget for maintenance and vacancy?

Accepted Answer

There’s no universal number — it depends heavily on the property’s age, condition, and local rental market. Common starting points some investors use are 5-10% of rent for maintenance and a vacancy rate matching your local market’s typical time-to-lease, but adjust based on the specific property’s history if you have it.

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Three numbers, three different questions

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