Cap Rate vs Cash-on-Cash vs IRR: Which Metric When?

Real estate investors quote three metrics constantly: cap rate, cash-on-cash, and IRR. Each measures something different; each hides what the others reveal. Mature investors use all three together rather than picking one. Understanding what each tells you (and what each doesn't) is foundational to evaluating any real estate investment, whether traditional rental or STR.

Cap rate: the unleveraged comparison

Cap rate = NOI (Net Operating Income) divided by property value. NOI is revenue minus operating expenses (no mortgage). Cap rate strips out financing — same property at 70% LTV vs all-cash has the same cap rate. This makes cap rate the standard metric for comparing properties to other properties or to alternative investments. STR cap rates 6-9% are typical; commercial 5-8%; multifamily 4-7%.

Cash-on-cash: annual leverage-aware return

Cash-on-cash = Annual pre-tax cash flow / Cash invested. Cash flow includes financing (mortgage payments are subtracted). Cash invested is your down payment + closing costs + initial improvements. This metric measures how hard your equity capital is working in year one. Strong real estate investments often show 8-12% cash-on-cash; STR with cost-seg + STR loophole can drive after-tax cash-on-cash significantly higher.

IRR: the multi-year synthesis

Internal Rate of Return = the discount rate that makes the NPV of all cash flows (including final sale) zero. IRR captures everything: leverage, time value, appreciation, depreciation recapture, refi cash-outs. It's the most complete metric and the hardest to game. Strong real estate IRRs over 5-10 year holds typically run 12-25%; cost-seg + STR loophole investors can push toward 25-40% in favorable scenarios.

Which to use when

Bridge to STR + cost segregation

STR investments distort traditional real estate metrics in interesting ways. Cap rates can look modest because operating expenses are higher than long-term rentals. Cash-on-cash returns look strong because revenue per square foot is higher. After-tax IRR is typically the strongest metric for STR + cost-seg + STR-loophole investors — federal tax savings from year-one bonus depreciation can dwarf the underlying property returns. See cost segregation for Airbnb properties for the tax-strategy side.

Frequently asked questions