Real estate has three headline return metrics. Each measures something different. Using the wrong one gets you into bad deals.
Cap Rate
Cap Rate = NOI ÷ Purchase Price. Unleveraged annual yield.
- What it tells you: What the property earns before any financing.
- What it hides: The impact of leverage, appreciation, principal paydown, and tax benefits.
- Best for: Comparing similar commercial properties in the same market. Setting the price you'll pay.
A 6% cap on a $10M NOI implies a $16.7M value. Cap rates are a market pricing language, not a return prediction.
Cash-on-Cash Return
CoC = Annual Pre-Tax Cash Flow ÷ Total Cash Invested.
- What it tells you: How hard your down payment is working, in year 1.
- What it hides: Everything else — appreciation, paydown, tax shelter, refi proceeds.
- Best for: Comparing similar deals with similar financing. Sanity-check for cash flow.
10% CoC on a rental is healthy in 2026. 15%+ is exceptional.
IRR (Internal Rate of Return)
The annualized time-weighted return that makes NPV = 0.
- What it tells you: The full deal return — cash flow + appreciation + paydown + exit proceeds — weighted for when dollars arrive.
- What it hides: Nothing meaningful. IRR is the professional standard.
- Best for: Comparing deals with different hold periods, financing, and exit assumptions. The metric syndicators quote.
Value-add multifamily typically targets 15–20% IRR to LPs. Ground-up development, 20–25%+.
Which one to use
| Metric | Use when |
|---|---|
| Cap Rate | Buying commercial. Comparing pricing. |
| Cash-on-Cash | Screening rentals. Optimizing leverage. |
| IRR | Modeling the whole deal. Comparing exits. |
The pros run all three. Cap rate sets your price. CoC keeps the lights on. IRR wins the argument at the LP meeting.