Cap Rate vs Cash Flow: Which Should You Prioritize?

Investor Behavior Benchmark: 67% of small multifamily investors (under 20 units) prioritize positive monthly cash flow over high cap rates when evaluating deals (National Multifamily Housing Council 2025).

The Fundamental Difference

The trap: High cap rate ≠ positive cash flow. A $200K property with $15K annual NOI has 7.5% cap rate. But if mortgage is $1,500/month, cash flow is negative.

How to Calculate Cap Rate

Formula: (Net Operating Income ÷ Purchase Price) × 100

Example:

• Property price: $250,000
• Monthly rent: $1,400
• Annual rent: $16,800
• Operating expenses: $4,200/year
• Net Operating Income: $12,600
• Cap rate: (12,600 ÷ 250,000) × 100 = 5.04%

Important: Cap rate ignores mortgage, down payment, and financing. That's both strength and weakness.

How to Calculate Cash Flow

Formula: Gross Rent - Operating Expenses - Mortgage Payment = Monthly Cash Flow

Example (same property):

• Monthly rent: $1,400
• Monthly operating expenses: $350
• Monthly mortgage (80% LTV, 6.5%, 30yr): $1,016
• Monthly cash flow: $1,400 - $350 - $1,016 = $34/month

Reality check: 5% cap rate but barely breaking even on cash flow. Why? Financing reduces cash flow.

Cap Rate: What It Shows & Doesn't Show

Strengths

• Fast market comparison (5% cap vs 7% cap)
• Shows if property is undervalued
• Compares across different down payments
• Indicates how hard property is working

Weaknesses

• Ignores your actual down payment and financing
• Ignores your specific expenses
• Only shows year 1 (doesn't account for rent growth)
• Can be manipulated (lower expenses = higher cap rate)

When cap rate matters most:

• Comparing similar properties in same market
• Identifying undervalued deals
• Understanding property's inherent value
• Evaluating seller's financial situation

Cash Flow: What It Shows & Doesn't Show

Strengths

• Shows REAL monthly profit in your account
• Drives long-term wealth (positive cash flow compounds)
• Provides safety net for vacancies/repairs
• Determines if property is truly investable

Weaknesses

• Highly dependent on your financing/down payment
• Not comparable across different investments (each unique)
• Doesn't show appreciation potential
• Can be negative temporarily (value-add property)

When cash flow matters most:

• Building income-producing portfolio
• Ensuring property sustainability
• Planning for vacancies and repairs
• Evaluating personal return on investment

The Real Numbers: Why Both Matter

Scenario: $300K Property, 8% Cap Rate

Deal A (5% Down, Maximum Leverage)

• Down payment: $15,000
• Annual NOI: $24,000 (8% cap rate)
• Annual mortgage: $22,000
• Annual cash flow: $2,000
• Cash-on-cash return: 13.3%
• Risk: High (small vacancy kills cash flow)

Deal B (25% Down, Conservative)

• Down payment: $75,000
• Annual NOI: $24,000 (8% cap rate)
• Annual mortgage: $15,400
• Annual cash flow: $8,600
• Cash-on-cash return: 11.5%
• Risk: Lower (more buffer for problems)

Same cap rate, different cash flow based on your financing.

Market Context: Capital Region Cap Rates vs Cash Flow (2026 Data)

Source: Zillow median prices (Jan 2026), HUD FMR rents ($1,230 Capital Region, $1,922 Kissimmee)

Insight: Troy offers best balance of cap rate and cash flow due to lowest median price ($278K vs $310K) with identical rental rates.

Which Should You Prioritize?

Choose CASH FLOW if:

• You want monthly income
• You have limited capital and leverage matters
• You're buying 1-4 unit properties
• You're new to investing (cash flow is more forgiving)
• You want to be semi-retired by income

Cash flow priority answer: "I need this property to pay me $300/month"

Choose CAP RATE if:

• You're buying larger multifamily (10+ units)
• You have significant capital and won't leverage much
• You're focused on long-term appreciation
• You can sustain negative cash flow temporarily
• You're evaluating portfolio performance

Cap rate priority answer: "This property should generate 7%+ annual return"

The Hybrid Approach (Best for Most Investors)

Require BOTH metrics:

1. Minimum cap rate: 6.5% (ensures property isn't overpriced)
2. Minimum cash flow: +$200/month per unit (ensures sustainability)

This filters out:

• Overpriced properties (low cap rate)
• Negative cash flow traps (over-leveraged deals)
• Speculative bubble properties

Common Mistakes

Mistake 1: Buying on cap rate alone

• Property has 8% cap rate but negative cash flow
• Costs you money every month despite "good" cap rate
• Result: Forced sale, equity loss

Mistake 2: Ignoring cap rate

• Focus only on cash flow
• Overpay for property (low cap rate)
• Limited appreciation potential
• Result: Wealth builds slowly

Mistake 3: Comparing cap rates across different down payments

• Your deal: 8% cap rate, 25% down
• Competitor's deal: 8% cap rate, 5% down
• Seems equal—but they have different cash flow
• Result: Misjudging investment quality

Mistake 4: Not accounting for expense differences

• Property A: 8% cap rate (expenses underestimated)
• Property B: 7.5% cap rate (realistic expenses)
• Property B is actually better deal
• Result: Buying inflated cap rate

Quick Decision Framework

Ask these questions in order:

1. Can this property sustain positive cash flow?

   • No → Pass
   • Yes → Continue

2. Is the cap rate at least 6.5%?

   • No → Property is overpriced
   • Yes → Continue

3. What's my required monthly cash flow?

   • If <$200/month per unit → May be too thin
   • If >$200/month per unit → Good sustainability

4. Can I afford the down payment and maintain reserves?

   • No → Pass or find better financing
   • Yes → Move forward

The Bottom Line

Cap rate = Does the property work mathematically? Cash flow = Does the property work for MY situation?

Best deals satisfy both. Avoid properties that excel in one but fail in the other.

Most new investors should prioritize cash flow (more forgiving), while experienced investors can balance both or skew cap rate for appreciation plays.

Ready to Evaluate Your Deal?

Whether you're analyzing your first investment or scaling your portfolio, understanding cap rates and cash flow is fundamental.

Contact Saad Tai

• NY License: #10401373295
• FL License: #SL3651394
• Phone: 518-348-9535
• Specialization: Multifamily investing in Capital Region and Kissimmee