Are you comparing rentals in Fairfield County or just across the border in Dutchess or Putnam and finding the numbers do not line up? You are not alone. Many properties look solid on paper until you separate cap rate from cash-on-cash and account for taxes, insurance, and financing. In this guide, you will learn how each metric works, what moves them in our local markets, and how to model deals with clarity. Let’s dive in.
Cap rate basics
Cap rate tells you the property-level yield before financing. It is financing-agnostic and useful for quick comparisons across towns and properties.
- Formula: Cap rate = NOI / Purchase Price.
- NOI calculation used here: Effective Gross Income minus operating expenses. We include a recurring reserve for capital replacements in expenses for conservative underwriting.
- What it means: A higher cap rate can signal higher yield or higher perceived risk. It reflects market pricing relative to income, not your personal cash flow.
Cash-on-cash basics
Cash-on-cash shows your annual cash yield on the actual cash you invest after debt service.
- Formula: Cash-on-cash = Before-Tax Cash Flow / Total Cash Invested.
- Before-Tax Cash Flow = NOI minus Annual Debt Service.
- Total Cash Invested includes down payment, closing costs, and any initial reserves or rehab.
- What it means: CoC is highly sensitive to loan terms, down payment, one-time costs, and points.
Cap rate vs cash-on-cash
- Cap rate ignores financing. Cash-on-cash is driven by it.
- Cap rate is best for market-level comparisons and valuation. Cash-on-cash is best for investor-level cash yield.
- Both are snapshots. They do not include appreciation, tax effects, or principal paydown.
What moves returns in Fairfield, Dutchess, Putnam
Local line items can swing both metrics. Build your model around these inputs:
- Rents and vacancy: Market rent vs in-place rent, concessions, turnover timing. Higher vacancy reduces NOI and cash flow.
- Property taxes: Large and variable by town and county. Connecticut towns and New York counties use different assessment methods and rates.
- Insurance: Coastal exposure in southwestern Fairfield County can raise hazard and flood insurance. Inland Dutchess and Putnam may be lower.
- Utilities: Who pays what. Owner-paid utilities cut NOI.
- Management: Third-party management for small rentals often ranges 6–10 percent of effective gross income, with local variation.
- Maintenance and reserves: Plan recurring repairs and a reserve for replacements.
- HOA or co-op fees: Common for condos and co-ops in some Fairfield County towns. These reduce NOI.
- Financing: LTV, interest rate, amortization, and points shift debt service and initial cash in.
Fairfield single-family example (illustrative)
This example uses a Fairfield County single-family rental. It shows how cap rate stays constant while cash-on-cash changes with financing.
Assumptions and NOI
- Purchase price: 600,000
- In-place rent: 4,000 per month → Gross Scheduled Income: 48,000
- Vacancy and credit loss: 6% → Effective Gross Income: 45,120
- Operating expenses: property tax 9,000; insurance 2,400; maintenance 3,600; management 8% of EGI = 3,610; utilities 0; reserves 2,400 → Total expenses: 20,010
- NOI = 45,120 − 20,010 = 25,110
- Cap rate = 25,110 ÷ 600,000 = 4.19%
Financing scenario 1: Conservative
- Down payment: 30% = 180,000; Loan: 420,000 at 6.5%; 30-year amort
- Annual debt service: about 31,800
- Before-Tax Cash Flow = 25,110 − 31,800 = −6,690
- Cash-on-cash = −6,690 ÷ 180,000 = −3.7%
Financing scenario 2: Higher leverage, interest-only
- Down payment: 20% = 120,000; Loan: 480,000 at 5.5%; interest-only
- Annual debt service: 26,400
- Before-Tax Cash Flow = 25,110 − 26,400 = −1,290
- Cash-on-cash = −1,290 ÷ 120,000 = −1.1%
Takeaways
- Cap rate at 4.19% is unchanged by financing.
- Cash-on-cash can be negative in high-price, low-yield areas when debt service exceeds NOI.
- Leverage or interest-only can narrow the gap, but cash remains tight if NOI is modest relative to price.
Dutchess small multifamily example (illustrative)
This Dutchess County four-unit example shows how similar dynamics play out in a small multifamily.
Assumptions and NOI
- Purchase price: 800,000
- Total annual rents: 60,000
- Vacancy and credit loss: 5% → Effective Gross Income: 57,000
- Operating expenses: property tax 10,000; insurance 3,000; repairs 6,000; management 7% of EGI = 3,990; owner-paid utilities 2,000; reserves 3,200 → Total expenses: 28,190
- NOI = 57,000 − 28,190 = 28,810
- Cap rate = 28,810 ÷ 800,000 = 3.6%
Agency-style financing
- Down payment: 25% = 200,000; Loan: 600,000 at 5.75%; 30-year amort
- Annual debt service: about 41,700
- Before-Tax Cash Flow = 28,810 − 41,700 = −12,890
- Cash-on-cash = −12,890 ÷ 200,000 = −6.4%
Local bank, lower rate
- Same down payment; Rate: 4.5%
- Annual debt service: about 37,200
- Before-Tax Cash Flow = 28,810 − 37,200 = −8,390
- Cash-on-cash = −8,390 ÷ 200,000 = −4.2%
Key point
- In commuter-influenced suburbs with higher taxes and tight pricing, small multifamily often shows low cap rates. Debt service can exceed NOI unless pricing, rents, or terms are very favorable.
Sensitivity checks to run
- Break-even rent change: How much rent must rise, or expenses fall, to get cash flow to zero under your loan.
- Interest rate range: Test cash-on-cash at rates plus or minus 1 to 2 percentage points.
- Vacancy shock: Model a 3 to 6 month vacancy and re-leasing costs, especially for single-family.
- CapEx shock: Add a roof or HVAC replacement to see the impact on one-year cash flow and multi-year returns.
- Property tax reset: Underwrite a post-purchase assessment change where relevant.
How to find current local inputs
- Rents: Check market data from large rental data providers and cross-check with local listings.
- Property taxes: Use town or county assessor and tax collector sites for assessed value and current rates.
- Insurance: Speak with a local insurance broker. Review FEMA flood maps for coastal Fairfield exposure.
- Vacancy and turnover: Review local broker reports and Census occupancy data for context.
- Lending terms: Ask local banks and credit unions about portfolio loans and current DSCR requirements.
- Tax rules: Review IRS guidance on residential rental property for deductible expenses and depreciation.
Build a simple worksheet
Set up a workbook with clear inputs and outputs so you can stress test any property.
Tabs to include
- Inputs: price, rent per unit, vacancy percent, ancillary income, taxes, insurance, utilities, maintenance, management percent, reserves, HOA, financing terms, points, closing costs, initial rehab.
- Calculations: Gross Scheduled Income, Effective Gross Income, total operating expenses, NOI, Cap rate, Annual debt service, Before-Tax Cash Flow, Total Cash Invested, Cash-on-cash.
- Sensitivity: Interest rate and down payment data tables; break-even rent.
- Output summary: Snapshot of NOI, cap rate, debt service, cash-on-cash, total cash required, and warning flags.
- Instructions: How to update assumptions and where to fetch local inputs.
Core formulas
- Gross Scheduled Income = sum of monthly rents × 12 + ancillary income.
- Effective Gross Income = GSI × (1 − Vacancy%).
- NOI = EGI − sum of operating expenses.
- Cap rate = NOI ÷ Purchase Price.
- Monthly payment = PMT(interest/12, amortization × 12, −loan amount).
- Annual debt service = monthly payment × 12, or interest-only rate × loan amount.
- Before-Tax Cash Flow = NOI − Annual debt service.
- Total Cash Invested = down payment + closing costs + initial rehab.
- Cash-on-cash = Before-Tax Cash Flow ÷ Total Cash Invested.
When to use each metric
- Screening: Start with cap rate to see if income supports price in a given town or submarket.
- Deep dive: Move to cash-on-cash to test loan terms, points, and closing costs against your cash goals.
- Ongoing monitoring: Track both as leases roll, taxes reset, and insurance changes. Re-run sensitivity checks when rates move.
Next steps
If you want a disciplined, side-by-side view of options in Fairfield County, Dutchess, or Putnam, set up your worksheet and plug in current taxes, insurance, and actual loan quotes. If you prefer a guided review, I am happy to walk you through assumptions, DSCR checks, and break-even analysis for a specific property.
Book a complimentary market consultation with Brenda Colon to request the editable worksheet and discuss a deal-screening session.
FAQs
Which metric should I use first for rentals?
- Start with cap rate to compare property-level income across markets, then use cash-on-cash to evaluate your cash yield under real financing terms.
Why can cash-on-cash be negative while cap rate is positive?
- Because debt service can exceed NOI when leverage or rates are high; cap rate excludes financing, cash-on-cash includes it.
How do property taxes in CT and NY affect returns?
- Taxes reduce NOI directly, which lowers cap rate and the cash remaining after debt service; always underwrite with actual tax bills or assessor estimates.
Should reserves for replacements be in NOI?
- Use a recurring reserve in NOI for conservative underwriting; model large one-time capital projects separately.
What local factors change insurance costs?
- Coastal Fairfield locations may require higher hazard or flood insurance due to exposure, while inland Dutchess and Putnam often have different risk profiles.
How do I estimate vacancy for a single-family vs small multifamily?
- Use submarket data and recent leasing experience; single-family homes can have longer re-leasing gaps, while small multifamily may have steadier occupancy depending on location.
