405. An 8% Cap Rate Doesn't Mean You Earn 8%

Key TakeawaysAn 8% cap rate does not equal an 8% return. Cap rate is a property-level metric based on NOI and purchase price—not your actual cash-on-cash return.Financing can dramatically change your returns. Interest rate, amortization, leverage, and loan structure can cause cash-on-cash returns to vary significantly—even on the exact same property.Don’t take the reported NOI at face value. Management fees, reserves, vacancy, credit loss, and other expenses may not be reflected in the seller’s numbers.Your true cash invested matters. Closing costs, capital expenditures, reserves, and other upfront costs can materially reduce your actual returns.Look beyond the interest rate—understand the loan constant. The loan constant captures both interest and principal repayment and can reveal whether the debt is helping or hurting your cash flow.Underwrite the entire deal, not just the cap rate. A strong investment decision comes down to the property’s true NOI, financing structure, and potential to increase NOI through value-add strategies.