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A little clarity for your next decision.
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Investor WorkspaceA little clarity for your next decision.
By Jerry Baker
A cap rate measures property income against property price, while a cash-on-cash rate measures cash paid or available against the investor's cash. That is why a net-leased property with a higher cap rate can produce less spending money than its headline suggests. To compare it with a DST, build the full bridge from rent to investor cash.
Triple net, often written NNN, describes a lease arrangement. Delaware statutory trust, or DST, describes a legal structure. A DST can own net-leased property, so “DST versus NNN” is not always a comparison of different buildings. Often it means a sponsored trust investment versus buying a net-leased building directly.
That distinction matters when someone quotes two percentages. One might describe the real estate before financing. The other might describe a target distribution after several layers of costs. Even if both numbers are accurate, putting them side by side can answer the wrong question.
This guide focuses on the arithmetic. It does not rank today's offerings or claim that either route earns more. Every figure below is an invented planning assumption, not a market quote, forecast, available investment, or typical fee.
Start by naming what each number measures, the period it covers, and the costs it includes. If the person presenting a rate cannot explain those three things, do not use it to set your household income budget.
A simple going-in cap rate is annual net operating income, or NOI, divided by the property purchase price. A property with $65,000 of NOI and a $1 million price has a 6.5% cap rate. The ratio describes the property at that price, before the investor's financing choices.
The OCC describes direct capitalization as dividing NOI by a cap rate to estimate value. Its lending guidance also stresses that NOI definitions and adjustments need review. An underwritten NOI can differ from actual cash flow and from income used for a loan covenant. [1]
Ask whether the advertised NOI comes from the last year, the current lease, or a future stabilized year. A projected rent increase should not be quietly treated as rent already received. Neither should a vacant suite be treated as occupied without an explicit assumption.
Also inspect the denominator. A seller's asking price is not always your full investment cost. Legal work, financing costs, required reserves, and other acquisition expenses may require more money than the advertised property price.
For this comparison, cash-on-cash means annual cash available to the investor after the stated costs and reserve contributions, divided by total cash invested at the start. It is a planning definition. Actual presentations may define the measure differently, so confirm the formula used.
A DST's displayed distribution rate might be a target, an annualized recent payment, or a projection for a named year. Those are not interchangeable. Ask what supports the payment and whether it comes from property operations, existing reserves, borrowed money, or another source.
Cash-on-cash is not total return. It does not, by itself, show whether the value of your investment rose or fell. Nor does it show what you will keep after a sale and taxes. Returning part of invested capital can create cash without creating profit.
The SEC's fee guidance encourages investors to examine purchase, ongoing, and sale costs, including what an investment must earn to break even. That is the right habit here: follow the money through the whole ownership chain. [2]
Use a schedule with a line for cash rent and other income, a line for vacancy or collection loss, and lines for property operating expenses. Show who pays each cost and whether a reimbursement is actually expected to be collected. The remainder is the stated NOI for the model.
Below that, list debt service, any additional ownership or asset-management cost, actual capital spending, and cash placed into reserves. Avoid subtracting a fee twice if it already appears in NOI. Likewise, do not count the same repair both as current spending and as a reserve deposit.
A reserve deposit moves cash into another pocket of the investment. It reduces current spendable cash but does not, by itself, destroy value. A fee paid to someone else and an unused reserve balance have different economic effects. Track the reserve balance as well as annual distributions.
Finally, divide investor cash by the correct cash investment. Include upfront cash costs and reserves in a full cash-budget comparison. An alternative ratio using only property equity may be useful, but label it. Changing the denominator should not be used to make a rate look better.
Assume a direct property costs $1 million and produces $65,000 of annual NOI. That NOI is already after all modeled property operating costs and collection losses. Assume a $500,000 interest-only loan at 5.5%, with no rate change during the illustrated year.
The buyer also pays $50,000 of acquisition and financing costs and deposits $50,000 into an initial reserve. Those are additional to the property price. Total initial uses are $1.1 million; after the loan, the buyer invests $600,000 in cash.
Below NOI, assume $5,000 for owner-level administration not already included above, plus a $6,000 annual contribution to the property reserve. There is no separate capital spending in this one-year base case. The reserve earns no interest, and there are no other expenses omitted from this simplified model.
| Direct property cash bridge | Annual amount |
|---|---|
| Net operating income | $65,000 |
| Interest-only debt service | ($27,500) |
| Additional owner administration | ($5,000) |
| Reserve contribution | ($6,000) |
| Cash available before personal tax | $26,500 |
The property cap rate is 6.5%. The cash-on-cash rate is $26,500 divided by $600,000, or about 4.42%. Both figures are correct under these assumptions. They measure different things.
The example is before personal federal and state taxes. It does not calculate depreciation, exchange basis, tax benefits, or an eventual sale. It also does not claim that the modeled closing costs or reserves are normal for direct NNN properties.
Now assume a hypothetical DST owns a property with the same $1 million purchase price, $65,000 NOI, and $500,000 interest-only loan at 5.5%. This isolates the effect of other assumptions; it does not imply that two real offerings will share the same property economics.
Assume the DST raises $630,000 of investor equity: $500,000 for the property equity, $90,000 for all initial acquisition, financing, and offering costs, and $40,000 for reserves. The total uses are $1.13 million, funded by $500,000 of debt and $630,000 of equity.
Below NOI, assume $8,000 of annual trust and asset-management costs not already deducted, plus a $4,000 annual reserve contribution. All modeled ongoing costs are included. There is no separate capital spending, no reserve interest, and no additional fee charged outside this schedule.
The cash available is $65,000 minus $27,500, minus $8,000, minus $4,000. That leaves $25,500, or about 4.05% of the $630,000 invested. The same underlying cap rate has led to a different investor cash rate.
For an equal $600,000 allocation, assume fractional ownership is permitted and all amounts scale evenly. The DST cash would be about $24,286 a year. Compare that with $26,500 from the direct example, then separately compare control, workload, risks, and access to money. The small model is not evidence that all direct deals outperform DSTs.
In the illustration, the DST has higher initial costs. A different real transaction could have a different pattern. The next question is what the costs purchase and whether the investment still offers reasonable value after paying them.
A direct buyer may pay advisers and managers separately. A sponsored offering may collect several charges within its total equity raise. Place both on the same schedule. Do not give one route a free pass merely because its expenses arrive as separate invoices.
Ask who earns each charge, whether it goes to an affiliate, and whether it changes with rent, asset value, or the sale price. A fixed fee and a share of revenue react differently when income declines. A deferred fee may still reduce sale proceeds even if it leaves early distributions untouched.
Unused reserves should not be labeled a fee. At the same time, an investor may have limited control over them. Review the rules for spending and returning those funds. The economic value of a reserve is not the same as having that cash available for your own emergency.
Remove the loan from the direct example and keep the other assumptions unchanged. Initial cash rises to $1.1 million. Cash available becomes $65,000 minus $5,000 and $6,000, or $54,000. That is about 4.91% cash-on-cash, higher than the leveraged example's 4.42%.
This happens because the assumed debt cost, combined with the expense structure, does not help the investor's current cash rate. Leverage is not a magic yield enhancer. Its effect depends on what the asset earns, what the loan costs, how it amortizes, and which capital base you compare.
Loan principal payments add another distinction. An amortizing loan reduces spendable cash, but part of each payment reduces debt. That principal reduction can build equity if other values hold. It is neither cash in your bank account nor a guaranteed gain on sale.
The OCC defines debt-service coverage as NOI divided by required debt service. A loan's covenant may use a specific NOI definition. For the interest-only model, $65,000 divided by $27,500 is about 2.36 times. That ratio is not the investor's cash-on-cash rate and is not a guarantee of payment. [1]
Triple-net terms generally place specified property costs on the tenant, but you still need the actual lease. Check exclusions, reimbursements, limits, roof and structure duties, insurance, and what changes if the tenant stops paying or leaves.
A tenant's obligation to pay is different from its ability to pay. A reimbursement owed but not collected will not fund the mortgage. A long lease also does not eliminate the cost of enforcing it or finding a new user after a default.
As a real-world disclosure example, Realty Income's 2025 annual report discusses taxes that may not be collectible from tenants, leasing commissions, concessions, and tenant-default risk. That is a filing example from one net-lease owner, not a claim about a particular DST, a recommendation, or an estimate of your costs. [3]
For a proposed direct purchase, use the lease and property reports. For a DST, also review the trust's reporting and decision rights. A trust that fits Revenue Ruling 2004-86 operates under important limits on its powers; investors should not assume it can freely change the plan whenever conditions change. [4]
Return to the leveraged direct example. Suppose NOI falls by 10%, from $65,000 to $58,500. Keep the debt payment, administration, and reserve contribution unchanged. Available cash becomes $20,000, or about 3.33% of initial cash.
The 10% property-income decline has cut investor cash by about 24.5%, from $26,500 to $20,000. Fixed costs explain the difference. It is worth seeing that effect before relying on the base-case payment to cover essential living expenses.
Under the DST example, the same NOI decline leaves $19,000 after the stated costs and reserve contribution. That is about 3.02% of $630,000. This calculation assumes the manager continues the reserve policy and pays all remaining cash; real distributions could follow different rules.
Next, try a major expense instead of a mild decline. If a $25,000 repair is paid from an existing reserve, the reserve falls by $25,000. Do not also subtract the same repair from distributions unless the plan replenishes the reserve from current income. Track both changes clearly if it does.
Suppose the direct buyer wants a 5.5% current cash rate on the same $600,000 investment. The required annual cash is $33,000. Add $27,500 of debt service, $5,000 of administration, and $6,000 of reserve funding. Required NOI becomes $71,500.
At a $1 million price, that implies a 7.15% property cap rate under this exact model. It does not mean a suitable property is available at that price or income. It simply shows what the assumptions would require.
Reverse the process for a quoted DST cash rate only when you know the full capital structure and cash bridge. Without the property's price, costs, debt, reserves, and distribution sources, there is no unique cap rate hidden inside the payment percentage.
A calculator that converts one percentage to the other should expose these inputs. A fixed rule such as “subtract one point” will fail when leverage, financing cost, fees, or reserve needs change. Even a detailed calculator cannot verify that a rent forecast is realistic.
Current cash is only part of the result. Suppose a property's forward NOI at sale is $70,000. A 5% exit cap rate implies a $1.4 million gross value. A 6% exit cap rate implies about $1.167 million. The one-point change reduces modeled gross value by about $233,333.
Those values are before selling costs, debt payoff, taxes, and any investment-level fees. If selling costs are 5% of price in both cases, modeled net property proceeds before debt are $1.33 million and about $1.108 million. The difference is about $221,667.
These are valuation illustrations, not full return forecasts. They do not add annual distributions or claim that either cap rate will occur. They show why an extra few hundred dollars of annual cash should not distract you from the assumptions driving the exit.
For a full holding-period comparison, include every contribution, distribution, sale cost, remaining loan, fee, and returned reserve. Use the timing of those cash flows for an internal rate of return calculation. A simple annual payment divided by original equity cannot answer that question.
The examples here are before tax. Your tax result may differ from your cash result because deductions, basis, debt payments, and income timing follow tax rules. In an exchange, prior basis can carry into the replacement investment, so two owners in similar properties may have different deductions.
Ask your CPA to use your basis and applicable federal and state rules. Do not assume that a distribution labeled cash flow is tax-free or that a quoted deduction reduces your current tax by the same dollar amount.
A useful comparison first reconciles the before-tax cash. Then it adds a separate tax schedule with stated assumptions. Mixing a cap rate before costs with a tax-adjusted yield after assumed deductions gives the appearance of precision without a common measurement.
Compare the same twelve months, too. A rent increase that starts halfway through the year produces less first-year cash than a full year at the new rent. A distribution that starts after your purchase may leave an initial gap in your personal budget.
Annualizing one monthly payment means multiplying that payment by twelve. It does not establish that the next eleven payments will match. Ask whether the figure reflects a full payment period, includes a catch-up amount, or excludes a temporary expense.
For an income plan, record the expected first payment date and actual dollars by month. Then create a separate steady-year estimate. This prevents a timing assumption from appearing to be a difference in investment quality. Neither schedule should promise cash that the lease, business plan, and distribution terms do not support.
Not enough information. The cap rate relates property NOI to price. The distribution rate relates payments to investor capital under its stated definition. Reconcile debt, costs, reserves, and payment sources before comparing. Neither percentage alone measures total return.
Yes. NNN describes lease terms, while DST describes a trust structure. You can compare direct ownership and DST ownership of similar net-leased assets, but you still need the actual lease, debt, offering costs, and investor rights for each.
No. A funded reserve remains an asset until spent, subject to its terms and risks. It can reduce current cash available to investors. Track its balance and ultimate use or return separately so a model does not treat the same money as both lost and later recovered.
No. The result depends on property income, interest, principal payments, costs, and invested cash. Debt can reduce current cash and amplify losses. Compare an unleveraged case with the actual loan terms instead of assuming that a smaller initial equity check creates a better result.
No. Several properties and capital structures can produce the same distribution rate. You need the underlying price and NOI, plus the debt, expenses, reserves, and cash sources. A backward calculation works only after those assumptions are explicit.
No. Read the cost allocation and tenant obligations. Collection problems, vacancy, lease rollover, and new-tenant costs can still affect the owner. Realty Income's filing provides examples of those risks within a net-lease business, rather than evidence that a specific investment will face them. [3]
No. It is cash paid out. Its source and tax character may differ, and your investment value can fall while you receive payments. A private DST can be illiquid and can lose principal, including the full investment. [5]
Request a complete bridge from property income to investor cash, alongside the initial sources-and-uses budget. Then request the leases, debt terms, fee schedule, reserve plan, and exit assumptions supporting it. The goal is a reconciled calculation you can explain, not a higher headline percentage.
Educational information, not an offer or a personal tax, legal, or investment recommendation. Examples are hypothetical and omit stated adjustments. Tax treatment depends on your facts and current law. Review your transaction with your CPA, attorney, and qualified intermediary. Real estate investments can lose value and may be illiquid.
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