For real estate investors—especially those exploring opportunities in the fast-growing Phoenix metro area—understanding key performance metrics is essential. Two of the most frequently used tools in evaluating real estate investment opportunities are Capitalization Rate (Cap Rate) and Cash-on-Cash Return. While both offer insights into profitability, they measure different aspects of an investment and serve different purposes.
In this post, we’ll break down what each metric tells you, why it matters, and how to use them when evaluating residential or commercial real estate in Phoenix, Scottsdale, Tempe, and surrounding Arizona cities.
What Is Cap Rate and Why Does It Matter?
The Capitalization Rate, or Cap Rate, gives you a quick snapshot of a property’s potential return if it were purchased with no financing. In other words, it shows how much income the property generates relative to its purchase price.
This metric is often used to compare properties side-by-side, especially those of the same asset class. For example, if you’re looking at two multifamily buildings in Glendale, one with a Cap Rate of 6% and another with 8%, the one with 8% might initially appear more attractive. However, it’s also important to note that higher cap rates can signal higher risk, depending on the property’s location, tenant quality, and maintenance needs.
Investors in areas like North Phoenix or Arcadia may accept lower cap rates in exchange for long-term stability and appreciation potential, while others may pursue higher cap rates in transitional neighborhoods that offer greater upside but come with more risk.
Cap rates are especially useful for assessing the value of income-producing properties and for estimating resale potential down the line. However, they don’t account for financing or actual cash invested, which is where the Cash-on-Cash Return comes in.
What Is Cash-on-Cash Return and Why Is It Important?
Cash-on-Cash Return focuses on the return you earn based on the actual cash you’ve invested, taking into account the effects of financing. It provides a much clearer picture of your real-world return, especially if you’re using a loan to acquire the property—as most investors do.
Let’s say you buy a property in Tempe with a down payment, and after accounting for mortgage payments, property management, repairs, and other costs, you’re left with a certain amount of annual profit. Cash-on-Cash Return calculates how much of that profit you’re making as a percentage of your upfront investment.
This metric is essential for determining how well your cash is working for you. It also helps you compare real estate investments with other options like stocks or bonds. If you’re earning an 8% cash-on-cash return on a rental property in Chandler, that might be more attractive than a 4% return from a lower-risk asset—depending on your risk tolerance.
Cash-on-Cash Return also reflects the impact of financing, which can make or break the profitability of a deal. Two investors can buy the same property at the same price, but if one has a better loan or less money tied up, their return could be significantly higher.
Cap Rate vs. Cash-on-Cash Return: Key Differences
While both metrics measure return, they do so from different perspectives. Cap Rate looks at the property itself, based on its income and market value, with no regard for how it was financed. It’s most useful for comparing properties or evaluating how much you’re paying relative to what you’re earning.
On the other hand, Cash-on-Cash Return is specific to the investor. It looks at the performance of your personal investment after expenses and financing. It’s especially valuable when you’re using leverage to maximize returns and need to ensure the deal makes sense from a cash flow standpoint.
Cap Rate is more commonly used when evaluating commercial properties or comparing the potential income of multiple investments. Cash-on-Cash Return becomes more relevant when you’re focused on managing monthly cash flow or planning your investment strategy based on available capital.
Both are valuable. The key is knowing when to use which metric and understanding that one doesn’t replace the other—they complement each other.
How Phoenix Investors Use These Metrics Together
In the Phoenix real estate market, where competition remains strong and property values continue to rise, it’s more important than ever to evaluate opportunities from multiple angles.
Let’s say you’re considering a triplex in Central Phoenix and a small retail strip center in Surprise. The triplex has a lower cap rate but offers consistent residential demand. The retail center has a higher cap rate but comes with more vacancy risk. Cap Rate helps you evaluate this trade-off.
Then, you plug in your financing scenario—perhaps you’re putting down 25% with a local lender—and calculate the Cash-on-Cash Return. If the retail center gives you a higher annual return on your invested cash, it might be the better play—assuming you’re comfortable with the risk and have strong property management in place.
Cap Rate tells you if the property is priced appropriately for the income it generates. Cash-on-Cash Return tells you whether it’s a smart use of your investment capital.
What’s Considered a Good Cap Rate or Cash-on-Cash Return in Phoenix?
There’s no universal “good” cap rate or cash-on-cash return, but general benchmarks do exist.
In 2024, Phoenix-area cap rates vary based on property type and location. Multifamily residential properties in desirable neighborhoods might range from 5 to 6.5 percent. Older commercial properties in transitional areas may yield closer to 7 or 8 percent.
As for Cash-on-Cash Return, anything above 6 percent is often considered healthy, especially if there’s long-term appreciation potential. Some investors target 8 to 10 percent or higher, depending on their risk appetite and investment goals.
Just remember that context matters. A lower return might be acceptable for a newer building in Scottsdale with low vacancy, while a higher return may be necessary for a riskier asset in an area with less stable tenant demand.
Mistakes to Avoid When Using These Metrics
-
Using Only One Metric – Relying on cap rate alone can be misleading if you’re not considering how financing will affect your cash flow. Likewise, cash-on-cash return doesn’t tell you much about the broader market value of the property.
-
Ignoring Expenses – Always account for all costs, including property management, repairs, vacancies, insurance, and taxes. Underestimating expenses will give you an inflated return and false confidence in the deal.
-
Assuming Returns Stay Static – Markets evolve, tenants move out, and interest rates change. Both cap rates and cash-on-cash returns are snapshots in time, not fixed numbers.
-
Comparing Different Property Types – Comparing the cap rate of a retail property to that of a residential rental is like comparing apples to oranges. Use the right benchmarks for the right asset class.
The Bottom Line: Use Both to Make Smarter Decisions
To make smart real estate investment decisions in Phoenix and surrounding areas, savvy investors use both Cap Rate and Cash-on-Cash Return together. One helps assess the value and income potential of the property, while the other reflects the actual return on your invested dollars.
If you’re analyzing a property and not sure how the numbers stack up, consult a local expert. A nuanced understanding of both metrics—and how they apply to Phoenix’s unique market—can help you avoid mistakes and choose properties that support your long-term goals.
Partner with Bellagio Real Estate for Smart Investment Guidance
Bellagio Real Estate provides investors across the Phoenix metro with personalized insight and full-service support—from acquisition to ongoing property management. Whether you’re a first-time investor or adding to your portfolio, our team helps you evaluate opportunities with clarity and confidence.
Call us today at (602) 427-5653 to speak with a real estate professional who understands the metrics, the market, and your goals. Your success is our mission.
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For real estate investors—especially those exploring opportunities in the fast-growing Phoenix metro area—understanding key performance metrics is essential. Two of the most frequently used tools in evaluating real estate investment opportunities are Capitalization Rate (Cap Rate) and Cash-on-Cash Return. While both offer insights into profitability, they measure different aspects of an investment and serve different purposes.
In this post, we’ll break down what each metric tells you, why it matters, and how to use them when evaluating residential or commercial real estate in Phoenix, Scottsdale, Tempe, and surrounding Arizona cities.
What Is Cap Rate and Why Does It Matter?
The Capitalization Rate, or Cap Rate, gives you a quick snapshot of a property’s potential return if it were purchased with no financing. In other words, it shows how much income the property generates relative to its purchase price.
This metric is often used to compare properties side-by-side, especially those of the same asset class. For example, if you’re looking at two multifamily buildings in Glendale, one with a Cap Rate of 6% and another with 8%, the one with 8% might initially appear more attractive. However, it’s also important to note that higher cap rates can signal higher risk, depending on the property’s location, tenant quality, and maintenance needs.
Investors in areas like North Phoenix or Arcadia may accept lower cap rates in exchange for long-term stability and appreciation potential, while others may pursue higher cap rates in transitional neighborhoods that offer greater upside but come with more risk.
Cap rates are especially useful for assessing the value of income-producing properties and for estimating resale potential down the line. However, they don’t account for financing or actual cash invested, which is where the Cash-on-Cash Return comes in.
What Is Cash-on-Cash Return and Why Is It Important?
Cash-on-Cash Return focuses on the return you earn based on the actual cash you’ve invested, taking into account the effects of financing. It provides a much clearer picture of your real-world return, especially if you’re using a loan to acquire the property—as most investors do.
Let’s say you buy a property in Tempe with a down payment, and after accounting for mortgage payments, property management, repairs, and other costs, you’re left with a certain amount of annual profit. Cash-on-Cash Return calculates how much of that profit you’re making as a percentage of your upfront investment.
This metric is essential for determining how well your cash is working for you. It also helps you compare real estate investments with other options like stocks or bonds. If you’re earning an 8% cash-on-cash return on a rental property in Chandler, that might be more attractive than a 4% return from a lower-risk asset—depending on your risk tolerance.
Cash-on-Cash Return also reflects the impact of financing, which can make or break the profitability of a deal. Two investors can buy the same property at the same price, but if one has a better loan or less money tied up, their return could be significantly higher.
Cap Rate vs. Cash-on-Cash Return: Key Differences
While both metrics measure return, they do so from different perspectives. Cap Rate looks at the property itself, based on its income and market value, with no regard for how it was financed. It’s most useful for comparing properties or evaluating how much you’re paying relative to what you’re earning.
On the other hand, Cash-on-Cash Return is specific to the investor. It looks at the performance of your personal investment after expenses and financing. It’s especially valuable when you’re using leverage to maximize returns and need to ensure the deal makes sense from a cash flow standpoint.
Cap Rate is more commonly used when evaluating commercial properties or comparing the potential income of multiple investments. Cash-on-Cash Return becomes more relevant when you’re focused on managing monthly cash flow or planning your investment strategy based on available capital.
Both are valuable. The key is knowing when to use which metric and understanding that one doesn’t replace the other—they complement each other.
How Phoenix Investors Use These Metrics Together
In the Phoenix real estate market, where competition remains strong and property values continue to rise, it’s more important than ever to evaluate opportunities from multiple angles.
Let’s say you’re considering a triplex in Central Phoenix and a small retail strip center in Surprise. The triplex has a lower cap rate but offers consistent residential demand. The retail center has a higher cap rate but comes with more vacancy risk. Cap Rate helps you evaluate this trade-off.
Then, you plug in your financing scenario—perhaps you’re putting down 25% with a local lender—and calculate the Cash-on-Cash Return. If the retail center gives you a higher annual return on your invested cash, it might be the better play—assuming you’re comfortable with the risk and have strong property management in place.
Cap Rate tells you if the property is priced appropriately for the income it generates. Cash-on-Cash Return tells you whether it’s a smart use of your investment capital.
What’s Considered a Good Cap Rate or Cash-on-Cash Return in Phoenix?
There’s no universal “good” cap rate or cash-on-cash return, but general benchmarks do exist.
In 2024, Phoenix-area cap rates vary based on property type and location. Multifamily residential properties in desirable neighborhoods might range from 5 to 6.5 percent. Older commercial properties in transitional areas may yield closer to 7 or 8 percent.
As for Cash-on-Cash Return, anything above 6 percent is often considered healthy, especially if there’s long-term appreciation potential. Some investors target 8 to 10 percent or higher, depending on their risk appetite and investment goals.
Just remember that context matters. A lower return might be acceptable for a newer building in Scottsdale with low vacancy, while a higher return may be necessary for a riskier asset in an area with less stable tenant demand.
Mistakes to Avoid When Using These Metrics
-
Using Only One Metric – Relying on cap rate alone can be misleading if you’re not considering how financing will affect your cash flow. Likewise, cash-on-cash return doesn’t tell you much about the broader market value of the property.
-
Ignoring Expenses – Always account for all costs, including property management, repairs, vacancies, insurance, and taxes. Underestimating expenses will give you an inflated return and false confidence in the deal.
-
Assuming Returns Stay Static – Markets evolve, tenants move out, and interest rates change. Both cap rates and cash-on-cash returns are snapshots in time, not fixed numbers.
-
Comparing Different Property Types – Comparing the cap rate of a retail property to that of a residential rental is like comparing apples to oranges. Use the right benchmarks for the right asset class.
The Bottom Line: Use Both to Make Smarter Decisions
To make smart real estate investment decisions in Phoenix and surrounding areas, savvy investors use both Cap Rate and Cash-on-Cash Return together. One helps assess the value and income potential of the property, while the other reflects the actual return on your invested dollars.
If you’re analyzing a property and not sure how the numbers stack up, consult a local expert. A nuanced understanding of both metrics—and how they apply to Phoenix’s unique market—can help you avoid mistakes and choose properties that support your long-term goals.
Partner with Bellagio Real Estate for Smart Investment Guidance
Bellagio Real Estate provides investors across the Phoenix metro with personalized insight and full-service support—from acquisition to ongoing property management. Whether you’re a first-time investor or adding to your portfolio, our team helps you evaluate opportunities with clarity and confidence.
Call us today at (602) 427-5653 to speak with a real estate professional who understands the metrics, the market, and your goals. Your success is our mission.