Capital Gain

A capital gain is the amount by which an asset's sale price beats its cost basis. For a rental it arrives only at the sale, which is why cash on cash return, a measure of annual cash flow, leaves it out entirely.

If the default property sold for $600,000 after five years, the gain would be the sale price, less selling costs, minus the adjusted cost basis. That basis starts near the purchase price plus improvements and falls each year by the depreciation claimed.

Investors in growing markets often accept a lower cash on cash return in exchange for an expected gain. That is a reasonable trade as long as the cash flow covers the holding costs without the owner adding money each month. Cash on cash measures that holding ability; the gain is the forecast on top.

Further reading: Capital Gain on Wikipedia.