Cap Rate vs Cash-on-Cash vs IRR: How NNN Investors Should Think About Returns

Three Different Questions, Three Different Numbers Every CRE return metric answers a different question. Mixing them up leads to bad decisions. - Cap rate answers: what is the unlevered yield on the asset at today's price? - Cash-on-cash answers: what is the levered cash yield on my equity, today? - IRR answers: what is my time-weighted return across the full hold, including exit? Cap Rate — The Pricing Tool Cap rate = Year 1 NOI ÷ Purchase Price Cap rate strips out financing and ignores time. It is the cleanest apples-to-apples comparison across deals. Use cap rate for: - Comparing two properties on the same day - Translating market spreads (e.g., 50 bps tighter for IG credit) - Sanity-checking pricing against recent comps What cap rate does NOT tell you: - Your actual cash yield (that depends on leverage) - Your total return (that depends on rent growth and exit cap) - Anything about risk Cash-on-Cash — The Income Tool Cash-on-Cash = Year 1 Pre-Tax Cash Flow ÷ Equity Invested This is the metric income-focused investors live on. A 6.5% cap deal at 65% LTV with 6.0% debt produces dramatically different cash-on-cash than the same deal at 50% LTV with 5.5% debt. Use cash-on-cash for: - Income planning and distributions - Comparing leverage scenarios on the same deal - Sizing equity check against income needs IRR — The Wealth Tool IRR is the discount rate that makes the NPV of all cash flows (acquisition, operations, sale) equal to zero. It is the only metric that captures both ongoing cash flow and the exit. A 7.5% cap rate with no rent bumps and a flat exit cap might IRR at 7.5%. The same 7.5% cap rate with 10% bumps every 5 years and a 25 bps exit cap compression might IRR at 11%. Same starting yield, vastly different wealth outcomes. Use IRR for: - Decision-making on long-term holds - Comparing deals with different bump structures - Evaluating different exit scenarios Where Investors Get Tripped Up Mistake 1: Comparing levered cash-on-cash to unlevered cap rates A 9% cash-on-cash deal at 75% LTV is not "better" than a 6.5% cap rate. It is the same deal with more leverage. Mistake 2: Underwriting IRR with a flat exit cap Almost everyone assumes the exit cap equals the entry cap. The market does not work that way. Always run sensitivity at +50 and -50 bps. Mistake 3: Confusing GAAP NOI with actual cash flow Straight-line rent, free rent periods, and leasing costs distort GAAP. For cash-on-cash, use actual cash NOI. Mistake 4: Ignoring the tax layer After-tax IRR with cost segregation can be 200–400 bps higher than pre-tax IRR. See the <a href="/blog/bonus-depreciation-cre-2026-guide">bonus depreciation guide</a>. A Concrete Example $3M Dollar General STNL, 6.75% cap, 65% LTV, 6.25% debt, 10-year hold, 10% bumps in year 5, 6.75% exit cap. - Cap rate: 6.75% - Year 1 cash-on-cash: ~6.4% (after debt service on $1.95M loan) - 10-year IRR (pre-tax): ~7.8% - 10-year IRR (after-tax with cost seg): ~10.5% Same deal, four different return numbers, each answering a different question. The Net Lease Investor's Decision Framework 1. Filter by cap rate to find market-priced deals 2. Stress cash-on-cash under multiple leverage scenarios 3. Underwrite IRR with sensitivity on exit cap and rent growth 4. Run the after-tax view with cost seg layered in 5. Make the decision on after-tax IRR — that is wealth creation How Net Lease World Helps Net Lease World's <a href="/deals">marketplace</a> displays cap rate, NOI, lease term, and bump schedule on every listing. Combine that with your leverage assumptions and a CPA's cost seg estimate, and you have all four return metrics in 15 minutes. FAQ Which metric matters most? After-tax IRR for long-term wealth. Cash-on-cash for current income. Cap rate for shopping. What is a "good" IRR on a net lease deal? 8–11% pre-tax IRR is market for stabilized STNL. 13–18% pre-tax is reasonable for value-add or development. Should I lever up to maximize cash-on-cash? Leverage amplifies both upside and downside. Inve…