Cap Rate measures asset performance independent of how you finance it. Cash-on-Cash measures your actual return on the actual cash you put in. DSCR measures whether the property can pay its own mortgage. You need all three. None of them is "the" answer.
Cap rate
Formula
Cap Rate = Net Operating Income / Purchase Price
NOI is gross rental income minus operating expenses (taxes, insurance, vacancy, repairs, CapEx, property management) BEFORE debt service. Purchase price is what you paid.
What it tells you
The unlevered yield of the property. A 7% cap rate means the property produces 7% of its purchase price in annual net income, regardless of how it's financed. It's the "What if I paid all cash?" return.
What good cap rates look like in Chicago
- South/West side small multifamily: 7.5–10%
- North side small multifamily: 4.5–6.5%
- Hyde Park, Logan Square, Lincoln Park: 4–6%
- SFR rentals: 4.5–7% typically
Cash-on-cash return
Formula
Cash-on-Cash = Annual Pre-Tax Cash Flow / Total Cash Invested
Cash flow is what hits your bank after the mortgage is paid. Cash invested is down payment + closing costs + rehab + carry — everything you spent.
What it tells you
The leveraged return on your actual dollars. This is the number that answers "what am I really earning on my money?" It's what most investors care about because nobody pays all cash.
What good numbers look like
- Stabilized rental: 8–12% is solid
- BRRRR post-refi: often 25%+ because most of your money is back
- Fix & Flip: not applicable (use ROI instead)
Debt Service Coverage Ratio (DSCR)
Formula
DSCR = NOI / Annual Debt Service
Annual debt service is your principal + interest payments over a year (taxes and insurance are already netted out of NOI).
What it tells you
Whether the property can pay its own mortgage from operations. A DSCR of 1.25 means the property generates 25% more income than it needs to cover debt service — a comfortable cushion.
Why lenders care
Almost every investor mortgage (DSCR, conventional, commercial small balance) underwrites to a minimum DSCR. Typical bar: 1.20–1.25. If your deal is below 1.20, you either need more down or a different loan product.
Which one matters most?
- Comparing properties: Cap Rate (eliminates the noise of how each one is financed)
- Deciding if a deal is worth the cash: Cash-on-Cash
- Getting the loan approved: DSCR
- Real-world investing: All three, plus your gut check on the neighborhood
How Prop-Folio surfaces them
Every Buy & Hold and BRRRR summary in Prop-Folio shows Cap Rate, Cash-on-Cash, and DSCR up front. PropScore weights all three (and a few others) by strategy, so a single 1–5 figure tells you whether the combination is workable.
Related: What is a Deal Score? · Hard money + DSCR in Chicago · Chicago BRRRR underwriting