When consulting in San Francisco, I often encounter people who consider cap rate and cash-on-cash return to be the same. Recently, an investor accepted a cap rate figure he saw online as his expected return, only to be surprised when he calculated it with actual loans and found the numbers to be completely different. To put it simply, the cap rate assumes a return as if purchased with cash, while cash-on-cash is the return based on the cash that actually comes into my hands after taking out a loan.

According to Zumper, as of August 15, 2026, the average rent in San Francisco is $4,346, which is a 24 percent increase from a year ago. This is attributed to the increase in hiring in the AI industry and the almost nonexistent new supply. The rent for a two-bedroom has risen to $6,020, surpassing $6,000 for the first time. Zillow reported the average home value in May of the same year to be $1,393,773, a 7.6 percent increase from the previous year, while Redfin reported the median sale price to be $1.7 million during the same period.

By bedroom size, studios are at $2,700, three-bedrooms at $7,386, and four-bedrooms and above at around $8,500. The trend in the San Francisco market shows that as the size increases, the rent increases sharply.

Property taxes are capped at 1 percent of the purchase price under California Prop 13, but when local bonds and special assessments are added, the actual burden often rises to between 1.1 and 1.3 percent. San Francisco is a unique administrative area where the city and county are combined, so the tax rate structure may differ from other regions, so please check the actual bill before purchasing.

Starting with the total return, if we apply a purchase price of $1.39 million and a monthly rent of $4,346, the annual total rent would be $52,152, resulting in a total return of about 3.75 percent. Assuming operating costs such as property tax, insurance, maintenance, management fees, and vacancy loss at a 50 percent rule, the net operating income would be around $26,076 per year. The cap rate calculated by dividing this amount by the purchase price is about 1.9 percent.

This is where the cash-on-cash return discussion begins. Assuming a down payment of 25 percent, or $347,500, and financing the rest with a loan, the monthly mortgage principal and interest would be deducted from the net operating income. The cash-on-cash return is calculated by dividing the remaining pre-tax cash flow by the actual cash invested of $347,500, which could be lower than the cap rate of 1.9 percent depending on the interest rate, or it could be higher due to leverage effects.

What problems arise if these two are confused? If you only look at the cap rate, you might miss the actual cash flow burden when the loan conditions are poor, and if you only consider cash-on-cash, you might underestimate the profitability of the asset itself without leverage. Both indicators should be considered together for proper comparisons between properties and loan conditions.

For example, applying a 6 percent interest rate to a loan of $1,042,500 could result in annual mortgage principal and interest exceeding the net operating income of $26,076. In such cases, the cash-on-cash return could drop into negative territory, making it just as important to check the interest conditions as it is to check the cap rate. San Francisco is considered one of the cities with strong rent regulations, so please also check the limits on rent increases based on the year of construction before purchasing.

From a total return perspective, it is worth considering the 7.6 percent increase in market value over the past year and the asset increase due to loan principal repayment. However, it is difficult to conclude that the current trend of skyrocketing rents will continue in a situation where there is almost no supply. If you are looking in school districts preferred by Korean families, please check the GreatSchools ratings and assignment boundaries before purchasing.

This article is not investment or legal advice, and please consult a professional before making any actual contracts.