Real Estate Investors
Cap Rate, Cash on Cash Return and DSCR Explained
Three numbers investors confuse constantly. What each one measures, how to calculate it, and which one your lender actually uses.
Updated 2026-08-21| Applies to: Rental property buyers and existing investors.
The short answer
Cap rate measures a property's unleveraged return and is used to compare properties. Cash on cash measures the return on the actual cash you invested, including financing. DSCR measures whether the property's income covers the mortgage payment, and it is the number a lender uses to approve a rental loan.
The three formulas
| Metric | Formula | Answers |
|---|---|---|
| Cap rate | Net operating income divided by purchase price | How does this property compare to others, ignoring the loan |
| Cash on cash | Annual pre tax cash flow divided by cash invested | What am I earning on the money I actually put in |
| DSCR | Property income divided by the mortgage payment including taxes, insurance and HOA | Will a lender finance this on the property's own cash flow |
A quick example
A duplex rents for $2,200 a month. Net operating income after taxes, insurance, vacancy and maintenance is $18,000 a year. At a $200,000 price the cap rate is 9%. If the total housing payment is $1,600, the DSCR is roughly 1.38, which most lenders view favorably. Cash on cash then depends entirely on your down payment and financing.
Where investors go wrong
- Leaving vacancy, maintenance and capital reserves out of net operating income
- Comparing a cap rate on real expenses against a listing's optimistic pro forma
- Using gross rent instead of net income in DSCR conversations
- Ignoring the effect of an older roof or furnace on the first two years of returns
Illustrative math only. Actual lender DSCR calculations, expense treatments and requirements vary by program.
Frequently Asked Questions
People also ask
Do DSCR loans require personal income documentation?
Generally no, DSCR loans focus primarily on the property's rental income relative to its payment rather than the borrower's personal income or employment history, though credit and reserves are still reviewed.
Read: Investment Property Mortgages in Northeast OhioDo DSCR loans require tax returns?
Generally no. Qualification is based on the property's income, credit, down payment and reserves rather than personal tax returns, though individual lenders can ask for more documentation.
Read: DSCR Loans ExplainedCan I put 15% down on a rental?
Some conventional single unit investment programs allow 15%, usually with stronger credit and pricing adjustments. Two to four unit rentals typically require more.
Read: How Much Down Payment Do You Need for an Investment Property?How much of my rent will a lender count?
Commonly around 75% of gross rent, though the exact treatment depends on the program and whether the income appears on your tax returns.
Read: Can Rental Income Help Me Qualify for a Mortgage?Can I use projected Airbnb income to qualify?
Some DSCR and non QM programs allow it with platform statements or a market analysis. Conventional financing generally does not use projected nightly income.
Read: Financing a Short Term Rental PropertyCan I buy a fourplex and live in one unit?
Yes, and doing so generally allows owner occupied terms if you occupy within the required time frame and stay for the required period.
Read: Financing a Duplex, Triplex or FourplexTerms used in this guide
- DSCR
- Debt Service Coverage Ratio: the rental income a property produces divided by its total monthly housing payment. A DSCR loan qualifies the property rather than the borrower's personal income.
- Investment Property
- A property purchased to generate rental income or appreciation rather than to occupy. It generally requires a larger down payment and carries different pricing.
- Loan to Value
- The loan amount divided by the property value. A $200,000 loan on a $250,000 home is an 80% LTV.
Written by
Manny Oloyede, Mortgage Broker
NMLS #1824463 | Ultimate Mortgage Brokers LLC NMLS #2619461 | Licensed in OH | KY | NC | PA | SC | TN | TX
I have worked in mortgage lending since 2018 out of the Akron / Cuyahoga Falls Branch, helping buyers, homeowners and investors across Northeast Ohio and every state where I am licensed. These guides reflect the questions I answer most often, written the way I would explain them on a call.
Keep reading
DSCR Loans Explained
How DSCR loans qualify a rental property on its own income instead of your tax returns, how the ratio is calculated and where investors run into trouble.
Real Estate InvestorsFinancing a Short Term Rental Property
Loan options for short term rentals, how lenders treat nightly rental income, and the local rules that can affect whether a property works.
Real Estate InvestorsHow Much Down Payment Do You Need for an Investment Property?
Typical down payment, reserve and credit requirements for rental property financing, and how the numbers change with unit count and loan type.
Real Estate InvestorsFinancing a Duplex, Triplex or Fourplex
How two to four unit properties are financed as a primary residence or an investment, how rental income is counted, and what changes at five units.
Questions about your own numbers?
Send over your goal, income type and timeline and you'll get a straight answer on what is realistic.