See this mistake constantly from newer buy-and-hold investors — using cap rate and cash-on-cash ROI like they mean the same thing. They don't, and mixing them up leads to bad buys.

Cap Rate = Net Operating Income (NOI) / Purchase Price

This ignores financing entirely. It tells you how the property performs as an all-cash asset, which is useful for comparing deals apples-to-apples regardless of how you're funding them.

Cash-on-Cash ROI = Annual Cash Flow / Total Cash Invested

This is what actually matters to YOU if you're using a loan — it accounts for your mortgage payment and only measures return on the cash you actually put in (down payment + closing + rehab).

Here's why the gap matters: a property can have a mediocre 5% cap rate but a great 12% cash-on-cash return if you get good leverage terms. Or it can have a strong 8% cap rate but negative cash-on-cash if your interest rate is eating the spread. Cap rate tells you if the deal is good. Cash-on-cash tells you if the deal is good FOR YOU, financed the way you're financing it.

Run both numbers before you buy, not just one. If anyone wants a spreadsheet that calculates both automatically (along with monthly cash flow), drop a comment and I'll share it.

Quick gut-check I run on every single property before I lock up a contract:

Max Allowable Offer (MAO) = (ARV × (1 − your buyer's target profit %)) − repair costs − holding costs − closing costs − your wholesale fee

Example: ARV is $200k, your end-buyer wants 20% profit, repairs are $30k, holding + closing costs run $12k, and you want a $10k assignment fee.

MAO = (200,000 × 0.80) − 30,000 − 12,000 − 10,000 = $108,000

If the seller wants more than that, you either renegotiate down or walk. It sounds obvious written out, but the number of wholesalers who skip this and lock up deals based on "gut feel" is way too high — and it's how you end up with a contract nobody wants to buy from you.

I built a free-to-use spreadsheet version of this (plug in your numbers, get MAO + a deal score instantly) if anyone wants it — drop a comment and I'll share it.