Sorry, But Cap Rates and Cash-on-Cash Are Worthless When Evaluating Multifamily

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OK. Fine. Cap Rates and COC are not worthless. But, they are almost worthless in reality — and totally worthless the way you are being taught to use them. That, and I needed a title that’d catch your attention because this stuff is important!

What IS Cap Rate?

Capitalization Rate is a metric that tracks behavior of the marketplace as it relates to risk appetite. Note, we are talking about behavior, marketplace, and risk, and we are not talking about property valuation. So, let’s talk…

Everyone is familiar with something called Comparative Market Analysis (CMA). The CMA is a method of estimating the value of a single family structure by comparing it to similar properties sold in the same location, called comps. In this process, we start out by taking a look at the comps and make adjustments to the known sold price to equalize as much as possible with the subject property.

For instance, if we are trying to estimate a value for a 3-bed, 2-bath home by using a 3-bed, 3-bath comp, then we’d need to start with the price for which our 3/3 comp sold and adjust it down for the fact that our subject only has 2 bathrooms whereas the comp has 3. And this type of arbitrage of specs and features would need to be completed at a rather detailed level in order to arrive at a reasonably refined estimate of value.

Further, having completed 100 of these, we’d begin to see the big picture, which would suggest that in this particular marketplace, and with this age range and style of home, people are willing to pay $X for a second bathroom, $Y for a third bathroom, $Z for a third bedroom, etc. Additionally, we’d begin to see that typical per-square-foot pricing of a single level 3/2 home is $A, and it needs to be discounted by $D with each additional bedroom, etc.

Related: How to Know What Cap Rate to Shoot For on Any Given Rental Property

This is somewhat of a science and a bit of an art. But, the thing to note here is the following: When we discuss pricing in this context, what we’re really talking about is how much people — meaning willing and able buyers — are willing to pay for this, that, or the other feature. Yes, we use the CMA to estimate the value of a specific house, but let’s not forget that what we are really tracking is market behavior.

Having put this into context, let’s come back to the cap rate.


What Is the Cap Rate?

The thinking in multifamily goes like this:

People buy multifamily because of the income (this is not actually completely true, but for now let’s just generalize). Therefore, while the CMA looked at property features to establish marketplace value, in multifamily we look at income and/or income potential.

The question our analysis asks is this: How much are people paying for this type of asset, with this much income potential, in this location?

Now, suppose you analyzed 100 closed transactions. Suppose you had accurate data as to the sale prices, incomes, and expenses for all 100 of these. With this data, you could figure out the NOI for each one and later back into the cap rate that the buyers paid, right?

Well, suppose all 100 of these closed transactions fell in the range of 7–7.5 percent cap rate. That gives you a pretty good idea of the market appetite, doesn’t it? I mean, they are not paying 4 percent cap, so they are not super aggressive — but neither are they holding out for 10 percent cap. From this data, you certainly glean a lot relative to market behavior.

A Question to Consider

Suppose you are analyzing this data in order to support your decision-making relative to a potential acquisition on your desk. Pardon my French, but what the hell did this data tell you that’s particularly useful relative to underwriting the worth of an investment? Did you find out how much or how stable your cash flow is likely to be in the years you are planning to hold? Did you find out what your expected appreciation might be? Did you find out how much the cash flows represented by this asset are really worth in the future (net present value of these cash flows)?

Don’t misunderstand me, cap rate is an important metric, just not the way most people use it.

Related: Cash on Cash Return: What It Is and Why It Can Be Deceptive

What About Cash-on-Cash?

Suppose you work at BiggerPockets, which, aside for one or two people, means that you are like twelve years old. Well, when you are young like that, you get hungry a lot. Do you see yourself leaving the building, getting on your bicycle, and riding over to the closest sandwich shop to pick up a big-old sub, large enough to feed everyone in the office? I see it — do you see it?

The sub has everything on it. There’s the beef, the cheese, and even some kosher pork (that only happens when you’re twelve and working at BP, but there you go).

You hop back onto your bike and ride back to work as quick as you can, ’cause you are hungry. You find a cutting board, lay the sub down, and begin to cut.

You offer a slice to Mindy first, naturally. You’d offer the first slice to Josh, but he’s not there. And in his absence, Mindy is the boss, so you do the right thing. Her slice is awesome. Moist, with lot’s of mayo, cheese, beef, and ham. Just perfect. Mindy is happy!

You grab a slice for yourself, and whoops — no cheese. It still tastes pretty good, but somehow, you didn’t get any cheese. And the slice is light on the mayo. Mindy’s return is 100 percent. Your’s, just three inches away, is only 83 percent. Yep, that cheese and mayo is worth 17 percent return. And you ain’t got any.

Static Metrics Stink

Cash-on-cash return is what we deem a static metric. It is akin to a snapshot in time. A still image. It is a true metric for that specific fragment of time, but this fragment may or may not be indicative of the entire tapestry that is your sandwich (I mean, your investment). Just because something is true over here, doesn’t mean it’ll be true over there.

Wouldn’t it be better to collect data from all of your coworkers, see how everyone’s slice of sandwich tasted, and then evaluate the entire sandwich is a whole?  Cash-on-cash doesn’t do that.


Most of what needs to be said on this subject is indeed in this article. However, most of it is between the lines. I’ve got to have some fun too.

What do you think?

Do you agree that cap rate and cash-on-cash aren’t super useful in these scenarios? Share your opinions below!

About Author

Ben Leybovich

Ben has been investing in multifamily residential real estate for over a decade. An expert in creative financing, he has been a guest on numerous real estate-related podcasts, including the BiggerPockets Podcast. He was also featured on the cover of REI Wealth Monthly and is a public speaker at events across the country. Most recently, he invested $20 million along with a partner into 215 units spread over two apartment communities in Phoenix. Ben is the creator of Cash Flow Freedom University and the author of House Hacking. Learn more about him at


  1. Dumitru Anton

    Oy Vey, Ben….

    I missed you. life wasn’t much fun without you and your threads…

    But for the life of me I didn’t take you for a bike rider. Is the Tesla collecting dust?

    Now my helpful contributing to the thread will be none, since I dind’t work with a multi-family yet.

    So, I’m just here fort the comments

    Ochen Priyatno!

  2. Angel Gutierrez

    My VERY FIRST house was a 22 unit apartment building that I got “shoe-horned” into in 1991. I bought it because I didn’t qualify with my VA to buy a house but the loan officer at the time made the “commercial ” loan to me for the apartments.

    Cap rates/roi/irr don’t mean squat if you’re an owner operator.

    The ONLY thing that matters is this:

    HOW MUCH $$ do I get paid to support:
    the taxman
    The plumber
    Babysit the tenants
    Etc etc etc…. ALL these people with their hand in my pocket that benefit from the sweat of my brow…

    I’ll ask again …. how much do “I” get paid?? Trust me….That’s ALL that matters folks and nothing else.

    Angel G.

    • Ben Leybovich

      Haha well, you cut through the bull pretty quick, Angel. The between-the-lines on your message is, of course, that land-lording is a service business, and you are nothing more than a service provider getting paid billable hours.

      That’s actually a very advanced concept, Angel. I don’t think most of BP audience is ready to internalize this 🙂

      • Angel Gutierrez

        That’s the REALITY of the business and until you’re thrown into the deep end of it all… nobody gets it…

        That’s why you should only buy 100 units or more so there’s plenty of money for management and you can sit back and talk about cap rates/ROI/IRR etc…


        • Ben Leybovich

          And things don’t change very much when you buy larger because if you syndicate you are still making fees 🙂

          Angel, as I mentioned – very advanced stuff! It’s a pleasure!

        • Dani Z.

          . . . as evidenced by my [way too many] 1PM – 1AM nights at the duplex (after the 7AM – noon day job), installing thermostats, hanging curtains, being my contractor’s go-fer to/from Home Depot (because of course, they have the late model Subaru, while I’ve got the ’97 Dodge Grand Caravan), stroking contractors’ egos, switching out switches and light fixtures, getting fiberglass down my jeans while sawzalling slime-filled pipe in the crawl space, etc. etc. etc.

          I’m earning less per hour as a landlord than I did as a 10-year-old selling watches for my grandpa.

          Oh and in Portland, I’m also greedy and evil.

          Wait, what were we talking about again? Cap rates?

        • Richard Humphreys

          Angel, your logic is impeccable. Now back up to greenhorn status. I am sure you remember those days:)You are sitting there with your VA authority in one hand and a little cash in the other. Is there a direct path to a 22 unit building, or….as I suspect, do you have to crawl before you walk (Thinking duplex). Thanks.


  3. Kevin Perk


    Great article.

    I have never looked at a cap rate in my entire investing career. Well…maybe that one time some banker wanted it.

    I’m like Angel. I always wanted to know what I would get paid after getting everyone else out of my pocket. The trick is to figure out how deep the pockets will be and how far everyone is going to reach into my pocket.



  4. Nancy E.

    Hello Ben,

    Interesting article and since we are now in the market for a Multi-Family, I am going to comment. The Cap Rate, Cash on Cash return, and Debt equity is a method analyzing the stats (expenses and revenue) associated with the property. It might not predict outcome, but it does force buyers to analyzed the deal and take into consideration all financial obligations. Yes, “how much do I get paid also.”

    We as investors know that there is no true method that guarantees success or profit. But, those who ignore the research, analysis, and consideration all the associated expenses are guarantee failure. Bigger Pockets is an advocate for due diligence on all real estate investment deals – Multi family is no different. Whatever method we use is better than no method at all! Going into a deal blind (without researching the #s) is a mishap waiting to occur. Good luck to all those newbie out there still looking for their first deal.

    Thanks for your insight.
    From Nancy

    • Ben Leybovich

      Nancy, you state: “It might not predict outcome, but it does force buyers to analyzed the deal and take into consideration all financial obligations…”

      Perhaps it’s my lack of understanding, but what’s the reason to do any kind of analysis if, as you say “it might not predict the outcome…”? Isn’t that what analysis is – a means of predicting the outcome? I mean, why bother analyzing something if we either already know what the outcome will be, or don’t care? lol

      Nancy – I do believe that proper analysis is a means of escalating, depreciating, and otherwise manipulating known data so as to predict/anticipate future performance. And today’s COC, Cap Rate, and return on equity have very little to do with it ?

      Thanks for reading and commenting!

  5. James Dujardin

    As much as I’d like to see the same thing when it comes to what is left in my pocket, I can’t help but wonder if that is what banks are looking for…
    Correct me if I am wrong, as I understand it banks look for different metrics between residential & commercial multifamily real estate…

    • Ben Leybovich

      Hah the banks want to know a lot of things. But, the first point to stress is that we underwrite for 3 ententes: ourselves, our investors/partners, and lenders. And it’s important to understand that this underwriting can be vastly different, stressing different hurdles.

      Having gotten that out of the way, all three groups (if they are smart enough) are interested in future performance more so than current. And the thing is – neither cash on cash nor Cap rate address that 🙂

  6. Ben Leybovich

    Nancy, you state: “It might not predict outcome, but it does force buyers to analyzed the deal and take into consideration all financial obligations…”

    Perhaps it’s my lack of understanding, but what’s the reason to do any kind of analysis if, as you say “it might not predict the outcome…”? Isn’t that what analysis is – a means of predicting the outcome? I mean, why bother analyzing something if we either already know what the outcome will be, or don’t care? lol

    Nancy – I do believe that proper analysis is a means of escalating, depreciating, and otherwise manipulating known data so as to predict/anticipate future performance. And today’s COC, Cap Rate, and return on equity have very little to do with it 🙂

    Thanks for reading and commenting!

    • Ben Leybovich

      HAHAH! Chris, considering that they are paying 40% of their income to Uncle Sam, I find it difficult to make the math add up on that 70% claim… Although, when you’re 12, anything goes – even renting a futon in your living room 🙂

      Here I am. It’s 8:15 am. I got up at 5:45 AM, which for a 43 year old with a diagnosis of MS is no small thing. Now I am sitting at my dining room table having breakfast. Overlooking my sparkling blue pool through an open 10ft. tall patio door. Life is good!

      On today’s agenda – hoping to hear back about our $6MM offer; seller is taking a bit of time because there is some creative financing involved with this one. Hoping also to hear back from my PM about income and OpEx on a $10MM property I underwrote day before yesterday – I am coming up a bit short, but I think I am a bit low on income and high on OpEx. We will massage those numbers and see if we can be competitive.

      At 10:00 AM I hop on a call with a client. They are 1031 exchanging into an apartment building, and they are paying me to make sure they are not missing something. I guess they decided that you get what you pay for, and in lieu of coming to BP for free advice decided to pay me for 6 hours of my time – my time ain’t cheep cause look at all of the fun things I could be doing 🙂

      I am not sure if I can claim to be financially independent, but I sure as hell am gainfully unemployed 🙂 LOL

      • Corey Adams

        Come on now, 40% of their income in taxes. Not everyone at BP is working toward FI, but I can assure you that the ones who are focused on it are not paying 40% in taxes. Between that and the title of this article it seems like you have a love for exaggerating lol. Would have liked to dive deeper into properly evaluating multi family, but maybe you’ve talked about it in another article.

        • Ben Leybovich

          Well, if you are making $80,000 – $120,000 per year, between income, FICA, and all the rest of the taxes you probably are paying just about 40%. Unless you own a bunch of real estate, or are offering sservices as an employee of your own S Corp. That should cover most at BP 🙂

      • Chris Ayers

        2 calls in a day’s work? I’d take that.

        I do pretty well for myself, but I punch a clock and have to do my 40 per week. Golden handcuffs as they call it. One day I’ll be at “baller” status sipping drinks by my pool in warmer weather climate, but until then I’ll be up at 5am to beat that morning rush.

  7. brian ploszay

    They are not useless, but only one financial analytic tool. Since I know my submarket, the first thing I look at is price per door. Then I look at the unit mix. Then I ask about the condition of the units. With just this info, I know if the building is priced correctly.

    Cap rates are dangerous for a few reasons. Using it as a benchmark against other building cap rates – causes mistakes. Major brokerages massage their financials (and cap rates) by leaving out certain expenses or minimizing others. You may be looking at a comparable with a false cap rate.

    • John Cadman

      Brian is right about evaluating condition. Yup – cap rates are meaningless when the condition means walls and ceilings with spider cracks and chunks of plaster hanging from horsehair, broken pipes and “nostalgic” bath and kitchen fixtures that “need a little TLC”. And that plays right into Ben’s distaste for snapshot data because poor condition means you need to spend like crazy to boost rents to max potential for your market. BUT – once I fix all the problems and get new tenants in at top market rent, I love using cap rates to market my multi-families.

    • Debra Murray

      So true. CAP rates are just one tool to analyzing a property. NOI is the numerator, but this only gives you a snap shot of the units. I do not understand why there is no formula for anticipated capital expenses.

      For example if it is anticipated that I need to replace an HVAC in every unit of a 30 year old 10 unit complex then that could easily add to $50,000. That cost is NOT in CAP rate as the cap expenditures are NOT part of NOI.

      People need to do calculations on anticipated CAP expenses for each unit and add (save) that cost against any anticipated return. Every time I do this in my market it is a no win situation.

  8. Paul Goldman

    I began investing in multifamily two years ago. I’ve acquired three properties now and I’ve learned to keep an eye on the cap rate when comparing properties. I’ve been watching a guru who preaches that the cap rate means nothing. So this article caught my eye. I use the cap rate in this way… Let’s say I’m comparing two properties, Property A can be purchased for 1MM. Property B can be purchased for 1.3MM After some due diligence and verifying income and expenses, I confirm the NOI on Property A is $100,000, thus having a cap rate of 10%. The NOI on Property B is $110,000, thus having a cap rate of 8.5%. As suggested in a comment above, the extra cash at the end of the day is what is most important. But if that were the case, Property B would win. But I like Property A because a smaller investment is resulting in only a slightly smaller return. Isn’t cap rate basically telling you how much return you are getting on your investment, much like an interest rate? I agree that demographics, vacancy rate history, and a whole list of items are just as important. But when all those things are equal, I’m thinking the best cap rate wins. Am I wrong?

    • Ben Leybovich

      Hre’s the thing, Paul:

      What you are focusing on is cash flow. Here’s the question I would ask… Which of these properties would allow me to improve the NOI the most? That’s the one I want.

      Cash flow is nice, but if you can’t manufacture equity, then you are stuck with the cash flow. If you hold the property long enough, go through several CapEx cycles, you’ll realize that you are giving back most of the cash flow.

      Therefore, the trick is the equity, which exists in the NOI delta.

      • Jason Werner

        “Here’s the question I would ask…Which of these properties would allow me to improve the NOI the most? That’s the one I want.”

        This comment is probably one of the biggest gold nuggets in this whole article. It’s about looking for properties that you can improve on, which in turn equals greater profits and return. Cap rate and COC are just metrics of the property at that point in time. Doesn’t say much about the future.

  9. Jim Frye

    THIS! Great article. Tough to make a rationale choice based on two numbers/metrics alone. Point-in-time metrics like CoC and Cap Rate can be super misleading when not taken into consideration with other, more ‘complete-view’ metrics (e.g., irr, appreciation, nvp of CFs). Property analysis needs to be multifaceted.

    • Ben Leybovich

      “Point-in-time” – I love it. I refer to them as static. But we mean the same thing.

      We have to consider all of the cash flow events. We have to discount these events to NPV. Property analysis indeed needs to be multi-dimensional.

      You read between my lines, Jim. Thank you 🙂

  10. adam byrne

    Hi Ben, I think many investors are savvy enough to understand the difference between Cap rate and Proforma Cap rate. Cap takes a snapshot – like you say – of the current NOI / Achievable Market Price. Proforma creates an image of the property performing at 100% occupancy and market rents. It assumes you’re adding value to bring the property up to its highest and best use.

    Cap rate is critical indicator to tell us how is the property performing right now but must be used in a holistic equation of current and potential value.

  11. Gregory Ballard

    Hey Ben!

    I absolutely agree. All the formulas mean “0” if you don’t make a buck. The most meaningful metric is profit. Do you have some alternative ways of valuing a property or using metrics like cap rates and cash-on-cash?

  12. Ryan Smith

    Hi Ben,

    I feel fairly confident in analyzing an SFR; however, I feel a little out of my depth when looking at a MFR greater than 4 units (even 3-4 is a stretch for me). Let me uses specifics to see if I can gain any insight from your experience.

    I am looking at 5 units in a 20 unit condo project. Listed at $775k with 100% occupancy at $1200 mo. It would be condominium ownership with a $200 COA per property. I apply all the BP principles of property analysis (5% Maintenance, 5% Cap Ex, 5% Vacancy, 10% Property Management).

    Assumption: Financing at 30yr amortization and 5% rate.

    What I end up coming up with is negative CoC -4.5% and at 4% cap rate at the list price. I interpret this information to mean that because there is a positive cap rate and a negative CoC return, my financing costs are the root of the negative CF. Additionally, the COA costs eat away at 12k in CF per year!

    My conclusion:

    Either I am doing something way wrong, have an invalid assumption, or I need a purchase price close to $500k for this to make sense to me (5% CoC and 6.3% cap rate at current rents). A reduction of over 30%!

    I know the rents can be increased more aggressively than inflation due to slightly below market current rent. I know that I will not have the cost of property management because I will be doing it. I would like to think that I will have beneficial appreciation and some loan paydown to fall back on…BUT I do not want to color my analysis rosy with all these assumptions that I cannot guarantee or will not remain constant.


    1) Do you see any flaw from my reasoning regarding improper application of CoC and cap rates as your article referenced?

    2) Am I missing something that is relevant in MFR in my analysis leading to a incorrect conclusion?

    I enjoyed reading your article, I guess what I wish it had more of are concrete examples of proper use! That is why I ask this questions.



    • Ben Leybovich

      So this is going to be on the long side.

      1. The “BP principles” that you are applying are wrong to begin with. How can you calculate CapEx as a “%”? Let’s say you have to replace a water-heater at a cost of $750. If your rents are $1,200, this replacement cost would represent 5%. However, if your rents are $800, then the same replacement costs constitutes almost 8%. This is why I keep telling anyone who’ll listen that CapEx and OpEx are dollar denominated line-items. There is a lot of bad advice on BP regarding this… Considering the above, 5% CapEx is a silly number. You’ll need to re-evaluate that.

      2. Physical vacancy of 5% is OK, but what about economic vacancy? Or are you assuming that you’ll never have to do an eviction, never endure any LTL, and never have to offer any concessions? If you are assuming this, it’s foolish. You’ll have to contend with all of the above. As such, if the physical vacancy in the sub-market is 5%, your economic vacancy will be at least 8% or more. You will need to revisit these numbers as well…

      3. Of course, without underwriting the deal fully, take the following with a grain of salt. But, just coming at it from the experience of being stuck in these numbers all day every day, I can tell you that $1,200 blended weighted rents, if you can project 2% OpEx escalation, 3% rent growth, a 6% Cap exit, and presuming no major CapEx at the front door, this might underwrite to about $100,000 – $110,000 per door purchase price and 15% – 16% IRR on a 10-year hold. 17% IRR on a 5-year hold. More if there’s no CpaEx. More if you can project a higher exit capitalization. Etc.


      4. The HOA fee is a huge uncontrollable line-item. Unless I could absolutely steal these, I wouldn’t even look. Also, the HOA in this case would scare me as it would rob me of control, and life-s too short to be fighting the board…

      So, while you could pay $500,000 fro these, I don’t know that you should.

      Hopefully this helps a little, Ryan.

        • Ben Leybovich

          Devang – you have to build a model which rationalizes all of the cash flows for the duration of the hold, and rationalizes the exit. This is the key. While all of these other metrics are static, requiring you to compute data that is a snapshot, building a model which results in an IRR requires projecting the entire hold…

          It takes me 6 hours typically to explain all of the moving parts. So, the answer to your question is no – unfortunately I cannot provide an example here…:(

    • Stewart VanValkenburg

      I know some people like low cap rates. If I increase the profit of an apartment complex by 1k/year at a 5% cap rate that means I’ve increased it’s value by 20k. If it was a 10% cap rate I’d only increase it’s value by 10k. So a low cap rate is good if you have a lot of plans to increase the profitability of the place. But if not, a low cap rate sucks a lot of the leverage you get from using other people’s money away.

      Anytime your cap rate is lower than your interest rate from your bank you get negative leverage.
      For example: A $500,000 purchase with a 30 year loan at 6% interest with 25% down.

      1) A 3% cap rate. That’s $15,000 profit – $26,979.72 in mortgage payments = -$11,979.72 for a negative 9.6% cash on cash return. It’s not really that bad because $4,605.04 of the $26,979.72 is paying down your mortgage that first year. Including mortgage paydown your cash on cash return is only a negative 5.9%.

      2) A 6% cap rate. That’s $30,000 profit – $26,979.72 in mortgage payments = $3,020.28 for a positive 2.4% cash on cash return. Counting mortgage paydown it’s 6.1% return.

      3) A 9% cap rate. That’s $45,000 profit – $26,979.72 in mortgage payments = $18,020.28 for a positive 14.4% cash on cash return. Counting mortgage paydown it’s 18.1% return.

      That’s why I don’t like to invest where cap rates are lower than interest rates. Appreciation, forced or otherwise, is required to make a profit.

      Now conceivably by 3 or 4 years in you’ll be able to raise the rent enough to cover all the costs and your mortgage costs will be the same. In 10 years you’ll be making a profit. But I’d buy something where you start making money from the beginning.

      I checked your area. Even loopnet has 8 or 9% cap rates. I think you can find a better deal if you look some more.

      • Ben Leybovich

        I am not sure what area you checked, since I don’t invest in my area any more. And if I did, I’d be getting 10% caps. But that’s beside the point.

        Question for you, Stewart. If, as you’ve pointed out, the game is all about creating value, which you can ultimately do at 4% Cap as well as 10% CAP, why does the cap rate matter? If what you are focused on is creating value then don’t you take the deal that allows you to do so, regardless of the cap rate?

        Further, would you buy a 5% cap where you believed you could create value vs. a 10% cap where you knew there was no growth?

  13. Donald S.

    Hi Ben,

    Good article, but I need to be a little contrarian to you here. While the idea of “forget those #’s things” and just tell me how much $ I’m bringing home is all well and good, in reality the point of determining what the ROI or IRR or CAP rates are is to tell you if buying the property is worth the investment.

    If I put 10 million into a project and make 150k/year, is that enough for me? Or am I better off putting that money somewhere else?

    Also, I expected a longer article with alternative measures to use if you consider cap and ROI “nearly worthless” as I know you don’t just buy whatever you find for whatever the owner asks.

    • Ben Leybovich

      Donald – I agree with you. Interestingly, in fact very interestingly, responses to this article so far can be grouped the following way: those who think I propose ignoring these numbers, and those who just plain don’t get anything I wrote.

      You wrote – “If I put 10 million into a project and make 150k/year, is that enough for me? Or am I better off putting that money somewhere else?” I am not sure if you are going after this intuitively or consciously, but you are hitting at the IRR and NPV. Within the context of those we do have a place for COC and Cap Rate. It’s just that the latter mean very little as stand-alone metrics.

      You see, Donald, we probably agree that cash flow is important. But, we realize that $100 of CF today 9 years from now doesn’t buy the same thing as it does today. As such, a sophisticated investor wants to know not how much cash flow he has at any time, but what it buys discounted to NPV. Apples to apples, right?

      • Opportunity cost. It what should drive any investment.. to or from.

        Having *Accurate* cash-on-cash projections to make the decision is really all that matters (for you).

        CAP, to me, is a metric for the masses,

        • Ben Leybovich

          Take one more step, Mike, to recognize the time value of money and adjust the cash-on-cash to net present value and you’ve arrived at IRR. And with this we are getting close 🙂

  14. Charles A.


    I find you very often condescending to almost everyone.
    It may be your style,but it doesn’t mean BP should keep providing you a platform to massage your puerile ego.

    It’s becoming a little tiring,and you really are not as infallible as you often project.
    Many of your assumptions are shallow and easy for my 5th grader to pick holes in.

    Sorry for being this honest.
    I’m a brutally honest guy.
    I say what most others think in their minds but probably can’t tell you out of political correctness.

    You need to know you write for a mixed audience of varying levels of investing sophistication,not just newbies who’ll gobble up whatever trash you put out.

    You need to do better.

  15. Zach Mitton

    Hmm… If only there was a way to legally invest with the Steven Cohen method, except in real estate. Like ya know… golfing with city planners and local hot shot real estate developers to find out where the next sure-thing area will be.

  16. In a market place where apples, oranges, pears and peaches are all options, I want my property to be the most perfectly ripe and attractive option, not to hard, not to soft.

    Cap rate is the only language everyone speaks. When offering my buildings, I back into a CAP I think will start the offers in. Then let the market interpret it up or down.

    Knowing your local market’s current appetite for returns (CAP) allows me to appear, at least from LoopNet, to be just-ripe.

  17. Andrew Jurinka

    If underwritten correctly and not overly optimistic, CAP rates are important if you want to know what you can get for your place in a sale and what you can expect if you’re going to refinance.

    As others have pointed out, “what I get paid”, in my world is reflected as cash-on-cash. This tells me how the invest is performing relative to an alternative investment.

    All of these are important and most would agree no single is telling of the quality or decision to make as an investment.

  18. Victoria Seale

    I’m newer to BP, and I have found a great deal of helpful info here on many topics. Some of my real estate mistakes in the past have been due to ignorance. This site has helped me realize how not to make the same mistakes again. That said, this article was so convoluted that it was difficult to follow, especially once the bike riding etc began. Maybe that’s an inside joke. I understand the basic premise, but the presentation was lacking.

    • Ben Leybovich

      I happen to think this is some of my better writing, Victoria. Entertaining and educational at once. Not to mention that judging by the number of comments the article created a lot of traffic, which is good for BP.

      You see, Victoria, when we write, we have a number of objectives. I think I hit all of the objectives with this one. I understand, though, that there are a few people who disagree. Or, perhaps, that’s the idea…?! What do you think?

        • Ben Leybovich

          Well, now that’s finally an interesting conversation, Victoria. First, let me ask you – why is that while you turned the article down as poorly written, others, some of whom might have initially felt that way also, but decided to dig deeper? Do you think you might have passed judgement to quickly? After all, the follow-up did result in lots of , as you say, enlightening commentary?

          Listen, before the article was over I told you – read between the lines. You decided not to. Others decided to give it a shot…

          There are two reasons I do things this way on BP. First, unlike so many here who believe education should be free, I do not. I paid and continue to pay for the things that I know with mistakes, heartache, and lost money. If I pay – you should pay. The price I ask you to pay is to open your mind and learn to read between the lines. Don’t you think that’s an even trade…?

          Secondly, if I can’t have fun doing it, there’s no reason for me to write. So, I write the way I like. If you see value in what I have to say, then you’ll get on-board with how that value is delivered. And if not, I understand. Plenty of other article for you to choose from on BP.

          Thanks indeed for giving me the opportunity to explain my position, Victoria.

  19. Jim Fredo

    My first real estate purchase was a multifamily in a depressed area, with a terrific cap rate (15%), compared to where I was living (2-4% in Los Angeles at the time.)

    My learning lesson was that an amazing cap rate mean %#^* when tenants pay rent last when times are tough. It means nothing when tenants sell drugs out of your units and you have to evict them (or they leave in the middle of the night, because a dealer higher up the food chain comes to collect their money, and you are left having to remove the safe that they bolted to the middle of the bedroom floor.)

    My units would have had an amazing income, based on the cap rate, if I would have understood WHY the cap rate was so high. It was garbage that took money out of my pocket, not put money in. But, I had an amazing cap rate!

    Point taken. I wish I had read that point before learning it the hard way all those years ago.

    That’s for the article!

  20. Ali Semir

    Agreed that both of these are only pieces of what should be analyzed. Same for NPV and IRR. I would add that you can look at cash on cash both in year one and in every year of your anticipated hold period.

    • Ben Leybovich

      Ali, I agree. However, IRR underwriting takes care of bother year-to-year COC, and the NPV discount. But, more importantly, it forces us to strategically consider both the cash flow from year to year, and the exit!

      • Ali Semir

        I would say IRR has some limitations as well, namely, the exit cap rate. If entry cap rates are useless now, then even more so trying to forecast an exit cap today for 5-10 years into the future. The relation between entry cap, exit cap and discount rate are often overlooked when sponsors look to raise equity and apply unreasonable assumptions or “spread”. I feel that IRR, NPV, multi-year CoC, and entry cap are all good checks with their own respective strengths and limitations. Great discussion!

  21. Matt R.

    Sometimes these metrics are in flux up or down and represent current weather reports in a sense. There could be clear skys ahead or a storm brewing and these measured metrics may or may not point to any reliable forecast in reality is what I have seen. In a nut shell, there is more to it. Stay cool!

  22. Kurt Kasdorf

    I didn’t find this article particularly helpful. Cap Rates are the primary metric that investors communicate regarding Multi-families investment opportunities, so if they are nearly worthless, what do you suggest? You hint that it should be something non-static. Ok, will this be in Part II ? Your sandwich analogy doesn’t help much here either.

    I find Cap rates are not entirely useful in evaluating a potential purchase (because, as you mention, they are too static), but they are EXTREMELY important in offering a property for sale, as I’m getting ready to do with a 36-unit. Its the first question everyone will ask my Agent, “what’s the Cap Rate?”.

    Your article needs to include more information to be helpful.

  23. Jeff Westover on

    As a part time landlord with a full time corporate finance job, I do think cap rates and cash on cash returns are useful. Sure, they’re static, but they do help me to understand whether a property is priced appropriately, and how quickly I will get my money back should the current metrics stay intact. They’re not perfect, but I think dismissing them entirely doesn’t make sense because if you don’t use these metrics than what do you use?

    To get around imperfections I burden my model significantly with maintenance costs to account for all of the unforeseen items that will occur. From there it comes down to due diligence on whether you believe the stated metrics.

    This is only a piece of the puzzle though, because it tells me whether a prospective property is properly priced. I then match this up against a minimum income goal I must get out of a property given the time I need to spend managing it and add 25% to it. Again, to account for unknown events. If both pieces align, I usually pull the trigger. If they don’t, I pass. This is the model that has worked for me.

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