Source: https://guthlabs.ai/docs/instruments/real-estate-cap-rate-cash-on-cash-return/mechanism/

instrument mechanism / verified-clean

# Real Estate Cap Rate & Cash-on-Cash Return mechanism

The inspectable method record for Real Estate Cap Rate & Cash-on-Cash Return, kept separate from implementation and qualification.

Status: **VERIFIED_CLEAN**Lifecycle: **verified-clean**

## Model scope

The two stated yield formulas are standard under the listed assumptions. The specification needs review because it promises a benchmark comparison without supplying the required input or methodology. Honest label: Educational estimate; not investment advice.

- The cap_rate=NOI/purchase_price formula is standard for an unlevered capitalization rate when NOI and purchase price use the same currency and NOI is annual.

- The cash_on_cash=annual_cash_flow/cash_invested formula is standard when annual cash flow is after debt service and cash invested includes the full initial cash contribution being evaluated.

- The stated output includes a comparison to a benchmark note, but no benchmark input, comparison formula, or definition of the benchmark is provided; that output cannot be computed from this specification.

## Units and conventions

- NOI, purchase price, cash invested, and annual cash flow are monetary amounts in the same currency; currency conversion must occur before calculation.

- NOI and annual cash flow are annual figures.

- Displayed percentage equals the decimal ratio multiplied by 100.

- Cash invested is assumed to include down payment and closing costs, as stated; whether reserves, prepaid expenses, renovations, or other initial costs are included is unspecified.

- NOI is assumed to exclude financing costs, while annual cash flow is assumed to be after debt service; taxes, insurance, maintenance, vacancy, and management costs should be treated consistently within NOI.

## Inspectable vector

One of 4 source-bound review vectors:

````
{
  "inputs": {
    "currency": "USD",
    "purchase_price": 250000,
    "NOI": 18000,
    "cash_invested": 75000,
    "annual_cash_flow": 6000
  },
  "expected_outputs": {
    "cap_rate_percent": 7.2,
    "cash_on_cash_percent": 8
  },
  "working": "cap rate = NOI / purchase price = 18,000 / 250,000 = 0.072; 0.072 × 100 = 7.2%. cash-on-cash = annual cash flow / cash invested = 6,000 / 75,000 = 0.08; 0.08 × 100 = 8%."
}
````

## Failure boundary

**BREAK_CLAIMED** · SELF_FLAGGED

Zero purchase price or zero cash invested produces undefined metrics, so the instrument must reject those inputs or show explicit undefined/error results. A separate hazard is sign ambiguity for negative annual cash flow, which can reverse cash-on-cash from -20% to +20% if losses are treated as unsigned magnitudes.

## Other records

[01**Overview**](<https://guthlabs.ai/docs/instruments/real-estate-cap-rate-cash-on-cash-return/>)[03**Implementation**](<https://guthlabs.ai/docs/instruments/real-estate-cap-rate-cash-on-cash-return/implementation/>)[04**Qualification**](<https://guthlabs.ai/docs/instruments/real-estate-cap-rate-cash-on-cash-return/qualification/>)

## Sources and evidence

These pointers bind the page to evidence. They do not grant authority or collapse verification into deployment.

- `VERIFIED_LEDGER.json`

- `evidence-tranche5/tranche5-results.json`

- `BOUNDARY_HAZARD_CATALOG.json`