Cap rate vs. cash-on-cash: which number actually matters in Metro Vancouver

Cap rate and cash-on-cash return answer different questions.

Cap rate asks: what does the property earn before financing? Cash-on-cash asks: what does the investor earn on the actual equity contributed after financing?

Confusing the two is one of the fastest ways to overpay in Metro Vancouver.

Cap rate is asset-level math

The capitalization rate is:

Net operating income / asset value

Net operating income is rent minus operating expenses before debt service. Mortgage payments do not enter the calculation. That is the point. Cap rate lets you compare two assets without letting one buyer’s financing structure distort the property-level result.

A $900,000 condo producing $31,500 of annual NOI has a 3.5% cap rate. Another condo producing the same NOI but priced at $1,000,000 has a 3.15% cap rate. On an unleveraged basis, the first asset is cheaper relative to its income.

Metro Vancouver condo cap rates often sit in the 3-4% range because prices have outrun rent growth. Rent has increased, but not fast enough to offset the combined effect of land value, low resale supply in desirable corridors, and buyer demand from owner-occupiers who do not price the property as an income asset.

Cash-on-cash is investor-level math

Cash-on-cash return is:

Annual pre-tax cash flow / equity invested

Equity invested usually means the down payment plus closing costs. Annual pre-tax cash flow means NOI minus mortgage payments.

Take the same $900,000 condo at a 3.5% cap rate:

• NOI: $31,500 per year
• Loan-to-value: 80%
• Mortgage: $720,000
• Interest rate: 6.5%
• Approximate annual interest cost: $46,800 before principal repayment

Even before amortization principal, the debt cost exceeds NOI by $15,300. Add principal, property-transfer costs, insurance pass-throughs, leasing friction, and vacancy allowance, and the pre-tax cash flow is negative.

If the investor contributes $180,000 down plus closing costs, the cash-on-cash return is not 3.5%. It is below zero.

That is the central Metro Vancouver problem: a property can be reasonable on a relative cap-rate basis and still be poor on a leveraged cash-flow basis.

When the math flips

The arbitrage window opens only when one or more variables move enough to offset the leverage drag.

A rate decrease can reduce debt service. Rent step-ups can lift NOI if the unit is materially under-rented and turnover is realistic. Renovation can create forced appreciation or higher achievable rent, but only if the building, strata bylaws, and target tenant pool support the improvement. A below-market purchase can also create room, but that is acquisition discipline, not spreadsheet optimism.

Use cap rate for relative asset comparison: which property is cheaper against its income stream before financing?

Use cash-on-cash for underwriting: what happens to your actual equity after mortgage payments, closing costs, vacancy, repairs, strata fees, and taxes?

The two numbers should sit side by side. Cap rate tells you whether the asset is priced rationally. Cash-on-cash tells you whether your capital survives the financing structure.

Estimates are illustrative only and are not financial, investment, tax, or mortgage advice.