Cap Rate vs. Cash-on-Cash vs. IRR: Which Metric Actually Matters
Four return metrics answer four different questions, and using the wrong one is how deals get mispriced. A practical guide to when cap rate, cash-on-cash, IRR, and equity multiple each apply.
Ask three multifamily investors what return a deal produces and you will get three numbers, all correct, none comparable. The confusion is not sloppiness. It is that cap rate, cash-on-cash, IRR, and equity multiple answer genuinely different questions, and each is the right answer to exactly one of them.
Here is what each measures and where each one lies to you.
The four metrics, side by side
| Metric | Question it answers | Includes debt? | Time-weighted? |
|---|---|---|---|
| Cap rate | What yield does the property produce at this price? | No | No, single year |
| Cash-on-cash | What cash will I receive this year on my equity? | Yes | No, single year |
| IRR | What compound annual return does the full hold produce? | Optionally | Yes |
| Equity multiple | How many times do I get my money back? | Yes | No |
Cap rate prices the property, not your return
The capitalization rate is net operating income divided by price. It deliberately ignores debt, capital expenditures, and everything past year one.
That makes it the right tool for one job: comparing what properties are trading for. A 24-unit building in Tucson and a 300-unit building in Atlanta are not otherwise comparable, and cap rate puts them on one axis.
It is the wrong tool for evaluating an investment, because no investor receives a cap rate. It is a pricing convention. Two buyers can agree precisely on the cap rate and still value the deal very differently once leverage and business plan are layered on.
Where it misleads: a cap rate is only as honest as the NOI behind it. A seller's NOI with no management fee, no replacement reserve, and property taxes at the old assessed basis will produce a cap rate 50 to 100 basis points above what the same property yields when underwritten properly.
Cash-on-cash is what the distribution check feels like
Cash-on-cash return is annual cash flow after debt service divided by equity invested. It is the number a limited partner experiences, because it approximates the actual distribution.
It is also the most leverage-sensitive metric of the four. An interest-only period raises cash-on-cash materially while it lasts, then drops it the year amortization begins. Year one cash-on-cash on a bridge deal routinely overstates the stabilized yield by several points.
Where it misleads: it says nothing about the exit, which is where most of the profit in a value-add deal lives. A deal can distribute 7% a year and still lose money if the exit reprices.
One genuinely useful signal: compare cash-on-cash to the cap rate. Above it means positive leverage, where debt is accretive. Below it means the debt is diluting returns.
IRR is the committee's metric, and the most gameable
IRR is the only common metric that prices timing. A dollar in year one is worth more than a dollar in year five, and IRR is what captures that.
That strength is also the weakness. Because IRR discounts by time, it can be inflated by pulling cash forward without creating any additional profit. A cash-out refinance in year two can add several hundred basis points of IRR while total dollars returned stay identical.
It also implicitly assumes interim distributions get reinvested at the same rate, which is essentially never true.
Where it misleads: a 30% IRR over eleven months and a 30% IRR over five years are wildly different outcomes. IRR alone cannot distinguish them.
Equity multiple is the honest counterweight
The equity multiple is total distributions divided by total equity. It ignores timing entirely, which is exactly why it belongs next to IRR.
Subtract 1.0x to read the profit. A 1.8x deal returns 0.8x in profit on top of the original capital.
Where it misleads: on its own it makes slow deals look fine. A 2.0x over four years is excellent. A 2.0x over twelve years is a bond with extra steps and no liquidity.
The pairing rule
No single metric survives contact with a real deal. The working rule is to read them in pairs, because each pair cancels the other's blind spot:
- Cap rate with yield on cost. Cap rate prices the deal as it is. Yield on cost prices it as your plan will make it. The spread between yield on cost and market cap rate is the value your business plan actually creates.
- IRR with equity multiple. Timing versus magnitude. If IRR is strong and the multiple is thin, find the capital event responsible.
- Cash-on-cash across years, not once. Year one, stabilized, and post-amortization are three different numbers. A value-add deal showing near zero in year one is working as designed.
What this looks like in practice
Consider two deals, both $6,000,000, both five year holds:
| Deal A | Deal B | |
|---|---|---|
| Going-in cap rate | 6.5% | 5.4% |
| Year 1 cash-on-cash | 6.1% | 1.2% |
| Levered IRR | 12.8% | 17.9% |
| Equity multiple | 1.61x | 1.94x |
Deal A is a stabilized asset: it pays from day one and it will not surprise you. Deal B is a value-add plan where nearly all the return arrives at exit.
Neither is better in the abstract. Deal A suits an investor who needs current income and cannot tolerate execution risk. Deal B suits one who can wait and believes the business plan. The mistake is comparing them on a single metric and concluding one wins.
The cap rate alone says A. The IRR alone says B. Reading the pairs tells you what you are actually choosing between.
MultiScreen computes all four metrics from a single offering memorandum, with the sensitivity grids that show how each one moves when the exit cap rate or rent growth assumption changes.
Terms in this post
- Capitalization Rate (Cap Rate)
A capitalization rate is a property's net operating income divided by its purchase price, expressed as a percentage, and it represents the unlevered annual yield the property produces at that price.
- Cash-on-Cash Return
Cash-on-cash return is the annual pre-tax cash flow after debt service divided by the total equity invested, measuring the yearly cash yield an investor actually receives on their money.
- Internal Rate of Return (IRR)
The internal rate of return is the annualized discount rate at which the present value of a deal's cash flows equals zero, making it the time-weighted compound annual return on invested equity.
- Equity Multiple
The equity multiple is total cash distributed to investors divided by total equity invested, expressed as a multiple, and it measures how many times an investor gets their money back over the full hold.
- Yield on Cost
Yield on cost is stabilized net operating income divided by total project cost including acquisition and capital expenditures, measuring the unlevered yield a business plan produces once complete.
More reading
- How to Underwrite a Multifamily Deal: A 7-Step Framework
A practical, repeatable framework for underwriting a multifamily acquisition, from rebuilding NOI off the T12 through sizing debt, modeling the business plan, and pressure-testing the exit.
- How to Read a T12: 9 Red Flags in Multifamily Financials
The trailing twelve is the primary evidence base for underwriting a multifamily acquisition. Here are the nine things experienced buyers look for, and what each one usually means.
- Your Exit Cap Rate Is Doing More Work Than Your Business Plan
The exit cap rate applies to the largest cash flow in a real estate model and is a pure assumption about a future market. Here is how much it moves returns, and how to underwrite it honestly.