Recently, a client asked during a consultation if a cap rate of 5% means that the return would be better if they purchased with a loan. They were confusing cap rate and cash on cash. In high-value areas like Bellevue, mixing these two concepts can lead to significant misunderstandings.

First, let's look at the numbers. The median sale price in Bellevue is approximately $1.5 million as of 2026 (Houzeo), and the average monthly rent is around $2,919 (Zumper, August 2026). The annual rental income is $35,028, and when divided by the purchase price, the total return rate is only 2.34%.

From this, if we subtract property taxes, insurance, and management fees, we get the net operating income, which is divided by the purchase price to calculate the cap rate. The effective property tax rate in King County, where Bellevue is located, is about 0.85%, with a median annual tax of $6,745 (propertytaxalmanac.com). Applying the 50% rule, the net operating income is $17,514 annually, and the cap rate drops to 1.17%.

In simple terms, the cap rate represents the pure return rate when no loans are used. In contrast, cash on cash measures the pre-tax cash flow relative to the actual cash invested, which can vary significantly based on loan terms.

The issue is that in a market with a low cap rate, loans can actually reduce returns. For example, assuming a 25% down payment and a 30-year mortgage at an interest rate of 6.75%, the annual principal and interest payments can far exceed the net operating income. In this case, cash on cash could drop to around -16%. If the loan interest rate is higher than the cap rate, using leverage will worsen the returns.

Nevertheless, Bellevue has many school districts favored by Korean families, and the rental demand remains steady. However, school district boundaries change frequently, so it's advisable to check the assigned school for the specific address before purchasing.

Using the 1% rule, Bellevue's characteristics become more pronounced. 1% of the purchase price is $15,000 per month, but the actual rent is only $2,919, which is about 0.19% of the purchase price. In terms of pure cash flow, this market is entirely different from the national average.

Due to the presence of large IT companies, the purchase prices in Bellevue have remained high for a long time. According to the same data, the average price for single-family homes is $1.64 million, while the average price for condos is $496,000 (Houzeo), indicating that the cap rate calculations can vary significantly based on the type of housing.

If considering condos, HOA fees must also be factored into the calculations. Even if the purchase price is lower, making the total return rate appear relatively high, adding HOA fees can reduce the net operating income more than expected.

I summarized the two metrics for that client as follows: the cap rate is the return rate when holding the property without any loans, while cash on cash can be higher or lower than the cap rate depending on how much debt is used. In a market where loan rates are higher than the cap rate, leverage can actually become a hindrance.

Investment property loans have different conditions compared to mortgages for primary residences. They often require a higher down payment and may come with slightly higher interest rates, so the previously assumed 25% down and 6.75% interest rate can vary based on personal credit and loan products.

By distinguishing between cap rate and cash on cash, it becomes clearer why investors are still drawn to areas like Bellevue. Many investors prioritize long-term asset appreciation over cash flow. However, this approach can vary in suitability depending on available funds and investment duration.

A low cap rate does not automatically mean a bad investment. It's essential to consider total returns from both price appreciation and asset growth. However, if the two metrics are confused when determining loan amounts, the results can be entirely different from expectations, so it's crucial to consult with an expert before finalizing any contracts.