Cap Rate vs Cash-on-Cash for Denver Investors

Are you comparing Denver investment properties and wondering why the same duplex can look great on one metric and weak on another? You are not alone. Two of the most useful numbers in your toolkit are cap rate and cash-on-cash, and they answer different questions. In this guide, you will learn what each metric means, the simple formulas, Denver-specific inputs to use, side-by-side examples, and how to compare deals fairly. Let’s dive in.

Cap rate vs cash-on-cash: the basics

Before you run numbers, it helps to be clear on definitions and what each metric does and does not include.

• Cap rate: A property’s income yield based on its Net Operating Income (NOI) and purchase price. It ignores financing and taxes, which makes it useful for comparing assets across neighborhoods or property types.
• Cash-on-cash (CoC): The annual pre-tax cash return on your actual cash invested after financing. It reflects your debt terms, down payment, and closing costs.

Key formulas you will use:

• Gross Scheduled Income (GSI) = monthly rent × 12 for all units
• Effective Gross Income (EGI) = GSI − vacancy and credit loss − concessions + other income
• Net Operating Income (NOI) = EGI − operating expenses (taxes, insurance, owner-paid utilities, maintenance, management, reserves). Exclude mortgage payments.
• Cap rate = NOI ÷ purchase price
• Annual Debt Service = annual principal and interest payments
• Before-tax Cash Flow = NOI − Annual Debt Service
• Cash-on-cash = Before-tax Cash Flow ÷ Initial Cash Invested (down payment + closing costs + initial repairs)

A quick mindset check:

• Cap rate is an asset-level view. It helps you screen and compare properties without the noise of financing.
• Cash-on-cash is your wallet-level view. It shows how your cash performs with a specific loan.

What drives Denver inputs

To get realistic numbers in Denver County, standardize your inputs and use the same definitions across properties. Here is what to gather and how to think about it.

Income assumptions

• Market rents: Use recent rent comps for similar unit types and neighborhoods. You can consult local MLS rental data, property managers, or rental trend services.
• Vacancy and concessions: Small landlords often use 3 to 10 percent depending on micro-market and seasonality. Use neighborhood-level comps or input from local managers.
• Other income: Laundry, parking, storage, or pet fees if applicable.

Operating expenses

• Property taxes: Colorado uses an assessment ratio and local mill levies. Check the Denver County Assessor and Treasurer to estimate actual tax for a specific address.
• Insurance: Get quotes for landlord policies. Factor climate and older housing stock when estimating premiums.
• Utilities: Clarify what tenants pay versus owner pays for water, sewer, trash, gas, and electricity.
• Maintenance and reserves: A common starting point is 5 to 10 percent of gross rent for maintenance, plus a separate reserve for larger capital items like roofs or HVAC.
• Management: Typical full-service fees for small residential rentals in Denver are often 6 to 10 percent of collected rent.
• HOA dues: For townhomes and some condo-style properties, HOAs are operating expenses that reduce NOI.

Financing terms

• Mortgage rates: Investor loans differ from primary residence loans. Get quotes for down payment, interest rate, amortization, and fees from local lenders or use national surveys as a baseline.
• Loan type and structure: Conventional investor loans, portfolio loans, and down payment requirements can change your annual debt service and therefore cash-on-cash.

Example calculations: duplex, townhome, single-family

The numbers below are illustrative and use consistent assumptions so you can see how each property type stacks up. Replace inputs with current local data before you make decisions.

Example A: Duplex with two 1BR units

• Purchase price: $550,000
• Monthly rent per unit: $1,800. GSI = 1,800 × 2 × 12 = $43,200
• Vacancy at 6 percent: $2,592. EGI = $40,608
• Operating expenses: taxes $5,500, insurance $1,200, owner utilities $1,800, maintenance $2,500, management fee 8 percent $3,248, reserves $2,000. Total = $16,248
• NOI = $40,608 − $16,248 = $24,360
• Cap rate = $24,360 ÷ $550,000 = 4.43 percent
• Financing: 25 percent down ($137,500). Loan = $412,500 at 5.00 percent, 30 years. Annual debt service ≈ $26,472
• Before-tax cash flow = $24,360 − $26,472 = −$2,112
• Cash-on-cash = −$2,112 ÷ $137,500 = −1.5 percent

Example B: Townhome with HOA

• Purchase price: $430,000
• Monthly rent: $2,200. GSI = $26,400
• Vacancy at 6 percent: $1,584. EGI = $24,816
• Operating expenses: HOA $3,000, taxes $3,800, insurance $1,000, owner utilities $0, maintenance $1,500, management 8 percent $1,985, reserves $1,000. Total = $12,285
• NOI = $24,816 − $12,285 = $12,531
• Cap rate = $12,531 ÷ $430,000 = 2.91 percent
• Financing: 25 percent down ($107,500). Loan = $322,500 at 5.00 percent, 30 years. Annual debt service ≈ $20,689
• Before-tax cash flow = $12,531 − $20,689 = −$8,158
• Cash-on-cash = −$8,158 ÷ $107,500 = −7.59 percent

Example C: Single-family rental, 3BR

• Purchase price: $600,000
• Monthly rent: $3,000. GSI = $36,000
• Vacancy at 6 percent: $2,160. EGI = $33,840
• Operating expenses: taxes $6,000, insurance $1,500, owner utilities $1,200, maintenance $3,000, management 8 percent $2,707, reserves $2,000. Total = $16,407
• NOI = $33,840 − $16,407 = $17,433
• Cap rate = $17,433 ÷ $600,000 = 2.90 percent
• Financing: 25 percent down ($150,000). Loan = $450,000 at 5.00 percent, 30 years. Annual debt service ≈ $28,905
• Before-tax cash flow = $17,433 − $28,905 = −$11,472
• Cash-on-cash = −$11,472 ÷ $150,000 = −7.65 percent

Quick comparison

What these numbers mean

• Cap rates provide an unlevered snapshot. The duplex shows a higher cap rate than the townhome and single-family, driven by two rent streams and lower HOA drag.
• Cash-on-cash highlights financing. Even with positive NOI, debt service can flip cash flow negative if rates are high or down payments are small.
• Property type matters. HOA-heavy properties and single-door assets can have lower NOI yield relative to price.

When to use each metric

When cap rate matters

• Market comparison across neighborhoods or property types
• Valuation check to see if price implies a reasonable NOI yield
• Screening for hold strategies that focus on unlevered returns

When cash-on-cash matters

• Evaluating how your cash performs under specific loan terms
• Planning short-term cash flow to cover debt and expenses
• Testing scenarios for rate, down payment, and amortization changes

Apples-to-apples checklist

Use this checklist to compare Denver deals fairly:

• Standardize NOI: same approach to vacancy, management, reserves, and which utilities are owner-paid.
• Normalize per door and per square foot when comparing duplexes to single-door properties.
• Separate capital expenditures: treat big repairs as one-time CapEx or annualize them, and be explicit.
• Hold financing constant across scenarios when comparing CoC, or show multiple scenarios side by side.
• Convert monthly inputs to annual before calculating ratios.
• Adjust for HOA dues as operating expenses in the NOI.

Quick sensitivity on the duplex

Here is how one change can shift results using the duplex example.

• If the interest rate increases from 5.00 percent to 6.00 percent on the same $412,500 loan: annual debt service rises to roughly $29,700. Before-tax cash flow becomes $24,360 − $29,700 = −$5,340. Cash-on-cash becomes −$5,340 ÷ $137,500 ≈ −3.88 percent.
• If you increase the down payment from 25 percent to 40 percent at 5.00 percent interest: loan = $330,000. Annual debt service ≈ $21,265. Before-tax cash flow becomes $24,360 − $21,265 = $3,095. Cash-on-cash becomes $3,095 ÷ $220,000 ≈ 1.41 percent.

The lesson is clear. CoC is very sensitive to loan terms, and small changes in rate or equity can swing cash flow outcomes.

Plan your next step

If you are weighing a duplex in Harvey Park, a townhome in Littleton, or a single-family near Cherry Creek, the right inputs and consistent math matter more than any single rule of thumb. Start with cap rate to screen on NOI yield, then pressure-test cash-on-cash under several financing scenarios. Build in realistic vacancy, management, and reserves so your numbers hold up after closing.

If you want a second set of eyes on a spreadsheet or need hyperlocal rent and expense comps, connect with the neighborhood-focused team that helps Denver investors make clear, confident decisions. Reach out to The Corbitt Group for a practical conversation about your next purchase or sale.

FAQs

What is cap rate on a Denver rental?

• Cap rate is the property’s unlevered income yield calculated as NOI divided by purchase price, which helps you compare assets across neighborhoods and property types.

How does cash-on-cash return work for investors?

• Cash-on-cash measures your pre-tax annual cash flow after debt service relative to your cash invested, which reflects your down payment and loan terms.

Which metric should Denver investors prioritize?

• Use both: cap rate to screen deals on an unlevered basis and cash-on-cash to see how financing affects your cash flow and risk.

How do I treat one-time major repairs in my analysis?

• Treat large immediate repairs as capital expenditures by either subtracting them from your cash invested or by annualizing them as a separate expense.

How sensitive is cash-on-cash to interest rates and down payment?

• Very sensitive: small changes in rate, down payment, or amortization can materially change annual debt service and your cash-on-cash outcome.

Do cap rate or cash-on-cash include taxes or depreciation?

• Cap rate ignores taxes and debt entirely, while cash-on-cash is a pre-tax metric; model tax effects like depreciation separately in a multi-year plan.