If you have been reading about investment property analysis, you have encountered both cap rate and cash-on-cash return. They are related but distinct, and using the wrong one at the wrong stage of your analysis leads to bad decisions. Here is a clear breakdown of both, with BC Interior numbers.
Corrected 6 October 2026. The first version of this post financed its example at 5.29%, which I can't source. The Bank of Canada's average for new uninsured 5-year fixed mortgages was 4.30% in May 2026, the latest month available when this was written, and the financed example below is recalculated at that rate. The point survives: the cash-on-cash return is still negative. I've also removed cap-rate ranges for Vancouver and Merritt that had no source.
Cap Rate: The Debt-Agnostic Screen
Cap rate (capitalisation rate) is calculated as:
Cap rate = Net Operating Income (NOI) ÷ Purchase Price
Net operating income is gross rent minus operating expenses (vacancy, property tax, insurance, management, maintenance) — but crucially, it does not include mortgage payments. Cap rate is completely agnostic to how you finance the purchase.
Example: A Kamloops duplex listed at $680,000 generates $3,800/month in gross rent ($45,600/year). Operating expenses (vacancy, tax, insurance, management, maintenance) total $18,200/year. NOI = $27,400. Cap rate = $27,400 ÷ $680,000 = 4.0%.
Cap rate is useful precisely because it strips out financing. You can compare a property financed at 20% down against one you could buy outright, or compare Kamloops properties against Merritt properties (see my Kamloops vs. Merritt breakdown) on equal terms.
Cash-on-Cash Return: What You Actually Earn on Your Money
Cash-on-cash return is:
Cash-on-cash = Annual Pre-Tax Cash Flow ÷ Total Cash Invested
This one accounts for your financing. Pre-tax cash flow is NOI minus your annual mortgage payments (principal and interest). Total cash invested is your down payment plus closing costs.
Same example, financed: 20% down on $680,000 = $136,000 down. Mortgage on $544,000 at 4.30% (the Bank of Canada's May 2026 average for new uninsured 5-year fixed mortgages), 25-year amortisation = approximately $2,951/month ($35,408/year). Pre-tax cash flow = $27,400 − $35,408 = about −$8,000/year. Cash-on-cash on $136,000 invested = about −5.9%. (Add closing costs to the cash invested and it's a little less negative in percentage terms, but no less negative in dollars.)
The same property that looked like a 4% cap rate is producing a negative cash-on-cash return once you add the mortgage.
Why the Gap Exists
This is the core issue in BC's current rate environment. The number to compare with the cap rate isn't just the interest rate, it's the mortgage constant: your annual payment as a share of the loan. At 4.30% over 25 years, that's about 6.5%, because every payment includes principal. When the mortgage constant (6.5%) is above the cap rate (4.0%), leverage works against you on a cash flow basis. Every dollar you borrow costs more in payments than it earns in operating income.
That's also why a property with a 5% cap rate can still lose money every month: 5% is still well short of 6.5%. Even the interest rate on its own (4.30%) is above this property's 4.0% cap rate.
This is not a Kamloops-specific problem. It is arithmetic, in any market where cap rates sit below the cost of borrowing. Bigger cities tend to have lower cap rates and smaller towns higher ones on paper, but a higher cap rate in a smaller market often comes with weaker rent and resale (see my Kamloops vs Merritt breakdown and the full monthly cost breakdown).
When to Use Each Metric
Use cap rate to screen properties in 60 seconds. If a listing agent gives you the gross rent and you know the purchase price, you can calculate a quick rough cap rate and decide whether it is worth a deeper look. A Kamloops residential property at 4% or above is worth running the full numbers on. Below 3.5%, it is likely a pure appreciation play at best.
Use cash-on-cash to actually decide whether to buy. Once you have a specific property, a confirmed financing rate, and realistic expense estimates, cash-on-cash tells you what return you are actually earning on the cash you are committing. It is the number that connects to your personal financial position.
What BC Interior Investors Are Actually Buying
Most residential investment properties in Kamloops are not positive cash flow when financed at current rates. The investment thesis is different: you are buying an appreciating asset, getting a tenant to cover a large portion of your carrying costs, and building equity through mortgage paydown over time.
The question cash-on-cash helps you answer is: how much am I personally contributing each month, and is that contribution justified by the long-term upside? If the cash-on-cash is around −6% but you believe the property will appreciate over time and you are building about $1,040 a month in equity through principal paydown (year one, on this example), the overall return picture may still be positive — but you need to run all those numbers together, and be honest that appreciation is the assumption doing the work. Kamloops single-family prices have been roughly flat since spring 2025 on AIR's benchmark.
One Practical Note
Some investors add principal paydown back into the cash-on-cash calculation to get a "total return on equity" figure. That is a legitimate approach, but it conflates cash flow (which you can spend today) with equity (which you can only access by selling or refinancing). Keep them separate in your analysis so you know exactly what you are dealing with.
For a first BC Interior investment property, start with cap rate to screen, then use cash-on-cash to size the monthly commitment you're taking on. Both numbers together tell a more complete story than either one alone.
Sources: Bank of Canada — interest rates for new lending by chartered banks · AIR — Kamloops market, May 2026 (3 June 2026)
Written by Jagatjeet, as part of a public BC Interior real estate learning journey. Published 22 June 2026. Corrected 6 October 2026. Updated 7 October 2026. Jagatjeet is working toward a BC real estate licence and is not a licensed realtor. Nothing here is financial, legal or tax advice.