Cash-on-Cash Return = Annual Cash Flow ÷ Total Cash Invested (down payment + closing costs + any upfront repairs), expressed as a percentage. Unlike cap rate, it accounts for financing — so it reflects the actual return on the money you personally put in, which is often what matters most to a leveraged buyer.
A property with a modest cap rate can still have a strong cash-on-cash return if it's financed favorably (low rate, small down payment relative to cash flow), and vice versa. Comparing both metrics side by side gives a fuller picture than either alone.