Cap Rate vs. Cash-on-Cash Return: What Des Moines Investors Need to Know
If you've spent any time in real estate investing circles, you've heard both of these terms thrown around — often interchangeably, and often incorrectly. Cap rate and cash-on-cash return are two different tools that answer two different questions. Confusing them is one of the most common underwriting mistakes small investors make.
Here's exactly what each one means, how to calculate it, and how to apply both to the Des Moines market.
Cap Rate: Evaluating the Asset
Cap rate (capitalization rate) measures the return a property would generate if you bought it with all cash — no mortgage, no financing. It's purely a measure of the property itself, not how you're buying it.
The formula:
Cap Rate = Net Operating Income / Purchase Price
Net Operating Income (NOI) = Gross rent – vacancy allowance – operating expenses (property taxes, insurance, maintenance, management fees, utilities you pay). NOI does not include mortgage payments.
Example Using Real Des Moines Numbers
A four-unit property in the Drake neighborhood:
Gross annual rent: $52,800 (4 units × $1,100/month)
Vacancy allowance (6%): –$3,168
Operating expenses (taxes, insurance, maintenance, management): –$14,400
NOI: $35,232
Purchase price: $380,000
35,232}{380,000}=0.093\approx9.3%
A 9.3% cap rate is a solid number in the Des Moines market. In 2026, suburban single-family and small multifamily properties in the metro are generally trading in the 7–10% cap rate range, depending on condition, location, and property type.
What Cap Rate Is Good For
Comparing two properties side by side, regardless of how they're financed
Evaluating whether you're paying a fair price relative to what the property earns
Benchmarking against market norms
What Cap Rate Doesn't Tell You
Whether the deal works for you at your specific financing terms
Your actual cash return on the money you put in
Cash-on-Cash Return: Evaluating the Deal
Cash-on-cash return (CoC) measures the actual cash income you receive relative to the actual cash you invested. It accounts for your financing, which is how most real estate actually gets bought.
The formula:
\text{Cash-on-Cash Return} = \frac{\text{Annual Pre-Tax Cash Flow}}{\text{Total Cash Invested}}
Annual pre-tax cash flow = NOI – annual debt service (mortgage payments)
Total cash invested = down payment + closing costs + any immediate repairs
Same Example, Now With Financing
NOI: $35,232
Down payment (25%): $95,000
Closing costs: $6,000
Immediate repairs: $8,000
Total cash invested: $109,000
Mortgage (75% of $380,000 at 7%, 30 years): ~$22,776/year
Annual cash flow: $35,232 – $22,776 = $12,456
\frac{12,456}{109,000}=0.114\approx11.4%
An 11.4% cash-on-cash return is strong by any standard. It means for every dollar you put into the deal, you're getting back $0.114 in actual cash per year — before appreciation, before principal paydown, before tax benefits.
What Cash-on-Cash Is Good For
Understanding your actual return on the money you committed
Comparing real estate investments to other places you could put that capital
Stress-testing a deal under different rent, vacancy, or interest rate assumptions
What Cash-on-Cash Doesn't Tell You
Whether you overpaid for the asset (that's the cap rate's job)
Total return, including appreciation and equity buildup
Where Investors Get These Wrong
Mistake 1: Using Pro Forma Rents Instead of Actual Rents
Sellers and brokers often present cap rates based on projected or "market" rents, not what the property is actually collecting. Always run your numbers on current, verified rent rolls. If a seller can't produce rent ledgers, that's a red flag.
Mistake 2: Ignoring Vacancy
A 0% vacancy assumption is not a conservative underwrite — it's wishful thinking. In Des Moines, the budget is for 5–7% vacancy even in strong markets. One month vacant per year on a $1,100 unit is already 8.3%.
Mistake 3: Underestimating Operating Expenses
The most commonly missed line items: property management fees (8–10% of collected rent), maintenance reserves ($100–$150/unit/month), capital expenditures (roof, HVAC, appliances). Skipping these makes your cap rate look better than it is.
Mistake 4: Confusing the Two Metrics
A high cap rate deal with expensive financing can produce a terrible cash-on-cash return. A lower cap rate deal with favorable terms can cash flow beautifully. Run both numbers on every deal.
A Quick Reference for Des Moines in 2026
Metric Typical Range in DSM MarketCap rate (small multifamily)7–10%Cap rate (SFR rentals)6–8%Cash-on-cash (leveraged, 25% down)8–14%Average 2BR rent $1,100/month Vacancy allowance 5–7% Management fee 8–10% of collected rent
These ranges shift by neighborhood, property condition, and financing terms. Ankeny and West Des Moines properties typically trade at lower cap rates (more expensive relative to income) due to appreciation demand. Central Des Moines and working-class neighborhoods offer higher cap rates with more value-add potential.
The Bottom Line
Cap rate tells you what the property is worth relative to what it earns. Cash-on-cash tells you what your money is actually making. You need both.
If you're evaluating a deal in Des Moines and want a second set of eyes on the numbers — someone who underwrites from actual operating experience, not just spreadsheets — that's exactly what we do at Grassroots.
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