Risk-Free Rate

The risk-free rate is the return on an investment with virtually no chance of default, usually taken as the yield on short-term US Treasury securities. It is the floor any rental's cash on cash return has to beat to be worth the extra work and risk.

The comparison is simple. If Treasuries pay 4% and a deal pays 3% cash on cash, you are taking on tenants and repairs for less current income than a bond would pay. Appreciation might still make it work, but that part of the return is a forecast, not a payment.

The risk-free rate also moves the market. When Treasury yields rise, buyers demand higher returns from property, cap rates tend to drift up and prices adjust. That is why a target cash on cash return set a few years ago may need revisiting when safe yields change.

Further reading: Risk-Free Rate on Wikipedia.