Cap rate vs. cash-on-cash

[Connor Wentling]

Hello!

I am just getting started in real estate investment and am working on purchasing my first rental. When analyzing a potential deal, which is a better indicator of a smart investment, cap rate, or a cash-on-cash return? I'm vaguely familiar with both terms and am trying to get much more familiar with them quickly, but figured using the brainpower of the Bigger Pockets forum wouldn't hurt!

Thanks for any help!

Connor

[Greg Scott]

Single Family homes, including duplexes, triplexes, quads are valued on a Comparison Market Analysis approach. (comps)  Commercial properties, including Multi Family (5+ units) is valued on the income approach. Because not all buyers are equal, different buyers will have access to different kinds of funding, so the funding portion must be taken out.  The unleveraged return on a commercial property is known as the Cap Rate.   Therefore, the Cap Rate is critical to assessing the valuation of commercial properties and is fairly meaningless in single family.

Cash-on-cash return in single family is more equivalent to Internal Rate of Return (IRR) in commercial