If you’re new to real estate investing, you’ve probably heard the terms cap rate and cash flow tossed around like they mean the same thing. In reality, they measure very different parts of the deal and knowing the difference is critical if you’re investing in Maine’s multifamily market.
What is Cap Rate?
Cap rate (short for capitalization rate) is a way to measure a property’s return based only on income and price and not financing. It’s calculated by taking net operating income (NOI) and dividing it by the purchase price.
Example: A 3-unit in Portland that generates $40,000 NOI and costs $650,000 has a cap rate of about 6.15%.
Cap rates are helpful for comparing properties across markets. Right now, in Cumberland and York Counties, small multifamily properties are trading in the 5.5%–7.5% range, depending on location and condition.
What is Cash Flow?
Cash flow is the actual money left over each month after paying your mortgage, taxes, insurance, and expenses. Unlike cap rate, it reflects your financing terms and how much you put down.
Example: That same 3-unit at a 6% cap could have positive or negative monthly cash flow depending on whether you finance it at 5% or 7.5%.
This is why cash flow is often more meaningful to individual investors—it shows how the deal works for you, not just on paper.
Don’t Forget Cash-on-Cash Return
Another key metric tied to cash flow is cash-on-cash return, which measures your annual cash flow against the actual cash you invested (down payment, closing costs, and improvements).
Example: If you invest $150,000 to buy that Portland triplex and it produces $15,000 a year in cash flow, that’s a 10% cash-on-cash return.
This metric makes it easy to compare real estate against other investments like stocks or bonds. If the S&P is returning 7% and your rental is producing 10% cash-on-cash, plus you’re building equity and enjoying tax advantages, real estate can look even more attractive.
So Which Matters More?
Cap Rate tells you if a property is priced fairly in the local market.
Cash Flow & Cash-on-Cash Return tell you how that property actually performs for your situation.
In Maine’s current market, where interest rates remain elevated and rents are strong but leveling off, cash-on-cash return is becoming the go-to metric for serious investors.
The Takeaway
Cap rates give you a snapshot, but cash flow and cash-on-cash return reveal the real story. In southern Maine’s multifamily market where competition is high and inventory is tight, the smartest investors look at all three metrics together before writing an offer.
Bottom line: Don’t just ask, “What’s the cap rate?” Ask, “What’s my return on the money I’m actually investing?” That’s where wealth is built.