Cap rate and ROI both measure return, but they answer different questions. Cap rate evaluates the property itself, ignoring financing; ROI evaluates your outcome, including everything.
Side by side
| Cap Rate | ROI | |
|---|---|---|
| What it measures | Property’s unlevered yield | Your total gain on cash spent |
| Includes financing? | No — by definition | Yes |
| Includes time? | Annual by construction | No — total unless annualized |
| Best for | Comparing properties to each other | Judging a completed investment |
| Typical range | 4–12% depending on market/class | Anything — depends on leverage |
Strengths of each
Cap Rate — strengths
- Standardized across buyers
- Great for screening markets
- Immune to financing choices
ROI — strengths
- Reflects your actual result
- Works for any investment type
- Simple to compute and explain
Worked example
A $650,000 property with $52,000 NOI has an 8% cap rate for every buyer. But an investor who put $130,000 down and cleared $14,000/year has a 10.8% cash ROI — financing changed the answer.
FAQ
Which should I use to compare two rentals?
Cap rate — it strips out financing so the comparison is apples to apples.
Can ROI be higher than cap rate?
Yes, that is leverage working for you. When ROI is below cap rate, debt is hurting the deal.