The same property can earn 3% for a cash buyer and lose money every month for a buyer with a loan. One worked example, with every number visible.
Cap rate and cash-on-cash return sound like two names for the same thing. They are not, and the gap between them is where many rental plans go wrong.
The example
Take an invented property: $800,000, renting for $3,600 a month. After 5% vacancy, tax, insurance, maintenance and management, it earns about $25,674 a year in net operating income. That is a cap rate of about 3.2%. A cash buyer earns roughly that on their money.
Now buy it with 25% down at 6.75% for 30 years. The loan payments come to about $46,699 a year, far more than the property earns. The result is a loss of about $21,025 a year before setting anything aside for the roof.
Why borrowing made it worse
A loan helps only when the property earns more than the loan costs. Here the property earns about 3.2% and the loan costs about 7.8% of its balance each year in payments. Every extra dollar borrowed makes the monthly result worse, not better.
What to do with that
It does not mean rentals never work. It means the math has to work at today’s rate, without counting on appreciation to rescue it. Run your own numbers in the rental analyzer, and we will happily take a second look at them with you.
Every figure here is invented to show the mechanics. It does not describe any real property or current rents.