Capital Appreciation

Capital appreciation is the increase in an asset's market value over time. For a rental it is often the largest part of total return, and cash on cash return excludes it entirely. Cash on cash measures the cash yield; appreciation is equity you cannot spend until you sell or refinance.

On a $250,000 property, 3% appreciation is $7,500 in the first year. Against $75,000 invested that is 10 points of return, more than the 6.3% the property pays in cash. Leverage magnifies it: the same $7,500 on a $262,500 all-cash purchase is under 3 points.

The exclusion is deliberate. Appreciation is a forecast until realized, it does not pay the mortgage, and it varies enormously by market and year. Investors in high-priced coastal metros accept 2 to 4% cash on cash because they expect appreciation to do the work; investors in cash-flow markets expect little of it. Total return and IRR are the measures that put the two together.

Further reading: Capital Appreciation on Wikipedia.