Cash-on-cash return is the annual cash flow a property pays to its owner, before income tax, divided by the cash the owner put in. It answers the question: for each dollar of equity invested, how many dollars come back each year?
How it is calculated
Cash-on-cash = annual pre-tax cash flow ÷ total cash invested.
Annual cash flow is NOI minus debt service (and any capital reserves the investor counts). Total cash invested is the equity: the down payment, closing costs and any upfront capital improvements.
For example, 120,000 of annual cash flow on 2,000,000 of equity is a 6 percent cash-on-cash return.
How leverage changes it
Debt changes the denominator. With a loan, the owner invests less equity, and if the property's yield is higher than the cost of the debt, the cash-on-cash return is higher than the cap rate. If the debt costs more than the property yields, leverage pulls the return below the cap rate.
How it differs from other measures
- Cap rate measures the property's income against its price, ignoring financing.
- Cash-on-cash measures the owner's cash yield after debt service, in one year.
- IRR and equity multiple include the full hold: growth, the sale and the timing of every cash flow.
Cash-on-cash does not show principal paydown, appreciation or the sale, so a property with a low cash yield and strong growth can be a better investment than its cash-on-cash suggests.