Are you comparing Prescott rental deals and getting mixed signals? One property looks solid on cap rate, yet your projected cash flow looks thin once you add a mortgage. You are not alone. Many first-time and small-portfolio investors mix up what each metric really tells you. In this guide, you will learn the clear difference between cap rate and cash-on-cash, how to calculate both with Prescott inputs, and how small changes in vacancy, HOA, and management fees can swing your results. Let’s dive in.
Cap rate vs cash-on-cash explained
Cap rate: Property yield without financing
Cap rate measures a property’s unlevered yield. It helps you compare properties without the noise of loan terms. Formula: Cap rate = NOI ÷ Purchase Price. Net Operating Income (NOI) = Effective Gross Income − Operating Expenses.
Use cap rate to compare intrinsic property performance across neighborhoods and property types. It also helps with valuation checks. For example, value can be approximated as NOI ÷ market cap rate.
Cash-on-cash: Your leveraged cash return
Cash-on-cash (CoC) measures your pre-tax cash yield on the actual cash you invest. Formula: Cash-on-Cash = Annual Pre-Tax Cash Flow ÷ Total Cash Invested. Annual Pre-Tax Cash Flow = NOI − Annual Debt Service. Total Cash Invested includes your down payment, closing costs, initial repairs or capital expenses, and reserves.
Use CoC to judge if a property meets your cash flow goals and to compare financing options. Two investors can have the same cap rate but very different cash-on-cash depending on loan terms and cash in.
What these metrics do not include
Neither metric captures appreciation, tax impacts like depreciation or interest deduction, principal paydown, or financing flexibility. These can be meaningful over time. Treat cap rate and CoC as the core income snapshot, then layer your long-term assumptions separately.
How to calculate returns in Prescott
Collect local inputs first
Gather the numbers before you model a deal:
- Gross scheduled rent using Prescott and Yavapai comps.
- Other income like pet fees, parking, or laundry.
- Vacancy rate assumption that fits the property type and seasonality.
- Operating expenses: property tax, insurance, HOA dues if any, property management, maintenance and repairs, utilities you cover, capital reserves, and any licensing or professional fees.
- Financing terms: down payment percent, interest rate, amortization.
- One-time costs: closing costs, immediate repairs or rehab, initial reserves.
Use compact, repeatable formulas
- Annual Gross Scheduled Rent = monthly rent × 12.
- Vacancy loss = GSR × vacancy rate. Effective Gross Income = GSR − vacancy + other income.
- NOI = EGI − operating expenses.
- Cap rate = NOI ÷ purchase price or current value.
- Annual Debt Service = monthly principal and interest × 12.
- Annual Pre-Tax Cash Flow = NOI − annual debt service.
- Total Cash Invested = down payment + closing costs + initial repairs + initial reserves.
- Cash-on-Cash = annual pre-tax cash flow ÷ total cash invested.
Prescott example: hypothetical single-family rental
The following is illustrative only to show how the math works. Replace every input with verified local comps, actual tax data, and real quotes.
- Purchase price: 425,000 dollars
- Monthly rent: 2,500 dollars. Annual Gross Scheduled Rent: 30,000 dollars
- Vacancy rate: 8 percent. Vacancy loss: 2,400 dollars
- Other income: 0 dollars
- Effective Gross Income: 27,600 dollars
Operating expenses (annual):
- Property tax: 3,400 dollars
- Insurance: 1,200 dollars
- Property management: 8 percent of EGI = 2,208 dollars
- Maintenance and repairs: 7 percent of EGI = 1,932 dollars
- Capital reserves: 1,200 dollars
- HOA: 0 dollars
- Total operating expenses: 9,940 dollars
NOI and cap rate:
- NOI: 27,600 − 9,940 = 17,660 dollars
- Cap rate: 17,660 ÷ 425,000 = 4.16 percent
Financing and cash flow:
- Down payment: 20 percent = 85,000 dollars. Loan: 340,000 dollars
- Assumed rate: 6.5 percent, 30-year fixed
- Estimated monthly principal and interest: about 2,149 dollars. Annual debt service: about 25,788 dollars
- Annual pre-tax cash flow: 17,660 − 25,788 = −8,128 dollars
- Total cash invested: 85,000 + closing costs at 1 percent (4,250) + initial repairs (5,000) = 94,250 dollars
- Cash-on-Cash: −8,128 ÷ 94,250 = −8.6 percent
What it means: a modest cap rate with negative CoC is common when prices are higher and mortgage rates push payments up. You can improve results with a lower price, stronger rent, tighter expenses, or different financing.
Local factors that move your numbers
Prescott and the wider Yavapai County include city neighborhoods, suburban subdivisions, condo and townhome communities, and rural homes. HOAs are common in attached product and some newer subdivisions, which can add a significant fixed cost. Demand comes from retirees, second-home owners, some student presence, and tourism. That mix can create rent seasonality and distinct vacancy patterns by area and property type.
Parts of Yavapai County face elevated wildfire risk. Insurance premiums and underwriting may vary by neighborhood and carrier, which can raise your annual operating costs. Short-term rental rules can differ between the City of Prescott, unincorporated county areas, and HOAs. Always confirm regulations before assuming STR income. For property taxes and assessments, use the Yavapai County Assessor for exact figures and any exemptions that could affect the bill.
Sensitivity: small changes, big swings
Small percentage changes can move your returns more than you think.
- If you add an HOA of 300 dollars per month, annual dues of 3,600 dollars would reduce the example NOI from 17,660 to 14,060. That would drop the cap rate by about 0.85 percentage points.
- If you reduce vacancy to 5 percent and management to 6 percent while holding other inputs constant, your NOI rises. That lift flows directly into cap rate and can narrow or remove negative cash-on-cash.
In practice, adjust only one variable at a time to see the impact. Then run a combined scenario that reflects what you can reasonably achieve.
Picking realistic assumptions in Yavapai
Vacancy for long-term single-family rentals often models at 5 to 10 percent for conservative planning. Property management typically ranges from 6 to 12 percent of collected rent, and many firms charge a leasing fee equal to 50 to 100 percent of one month’s rent for tenant placement. Maintenance and repairs are commonly set at 5 to 10 percent of collected rent or a fixed amount per home depending on age and condition.
Arizona effective property tax rates are often lower than the national average, but assessment rules vary. Always pull the actual tax bill. Get insurance quotes that reflect wildfire and liability exposure where relevant. Include HOA dues exactly as billed for condos and townhomes. For modeling ranges only, some analysts use 300,000 to 700,000 dollars for purchase prices and 1,600 to 3,000 dollars per month for typical rents across Prescott area inventory. Treat these as illustrative and verify with current comps.
Build your three-scenario plan
Create a simple three-way view so you are not surprised once you own the home.
- Pessimistic: lower rent, higher vacancy, higher management and maintenance, and an HOA if possible. Stress test insurance and taxes.
- Base case: your most likely numbers after talking with a local manager and reviewing current comps.
- Optimistic: conservative rent bump, lower vacancy, tighter expenses due to stronger tenant retention and no HOA.
This approach shows your likely range for cap rate and cash-on-cash and helps you decide if the deal fits your goals.
Where to get Prescott data
- MLS through a cooperating real estate agent for the best sales comps and recent rented listings.
- Yavapai County Assessor and Recorder for property tax history and deed data.
- Local property managers for rent ranges, leasing fees, and typical vacancy.
- Rentometer, Apartments.com, and Craigslist to sanity check rents and concessions.
- HUD Fair Market Rents and U.S. Census or ACS for baseline context.
- City of Prescott and Yavapai County websites for short-term rental and licensing rules.
Quick investor checklist
- Pull three to five recent rent comps and three to five comparable sales near your target property.
- Confirm property tax, insurance quotes, HOA dues, and management fees in writing.
- Build two calculators: unlevered cap rate and leveraged cash-on-cash.
- Run three scenarios that change vacancy, HOA, management, and maintenance so you see the range.
- Decide your minimum acceptable CoC and confirm the deal clears that bar with a margin of safety.
Next steps
You deserve clear numbers and a confident plan before you buy. If you want local comps, realistic expense assumptions, and a side-by-side cap rate and cash-on-cash analysis for Prescott or greater Yavapai, we are here to help. Connect with the Desert Luxe Team to build your model and find the right property for your goals.
FAQs
What is the difference between cap rate and cash-on-cash for Prescott rentals?
- Cap rate compares property-level yield without financing, while cash-on-cash shows your pre-tax cash return based on your loan and total cash invested.
How do vacancy, HOA dues, and management fees affect my returns?
- Vacancy reduces income directly and HOA and management fees reduce NOI dollar for dollar, which lowers both cap rate and cash-on-cash.
What cap rate or cash-on-cash should I expect in Prescott?
- It depends on neighborhood, property type, and leverage, with lower-risk single-family homes often showing lower cap rates and cash-on-cash shaped by your financing.
How do I get realistic rent comps in Yavapai County?
- Combine MLS rented and active listings with checks from local managers and rental sites, then adjust for size, condition, utilities, and location.
Should I model best case and worst case before buying a Prescott rental?
- Yes, run pessimistic, base, and optimistic scenarios so you understand how changes in rent, vacancy, insurance, HOA, and management shift your outcomes.
