What the equity actually earns.
Cash-on-cash return is the pre-tax cash a property throws off in a year, after debt service, divided by the cash the investor put in. Enter net operating income, annual debt service and total cash invested to see the return on equity and the cash flow behind it.
- Pre-tax cash flow
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The formula
Cash-on-cash return is annual pre-tax cash flow divided by total cash invested. Pre-tax cash flow is net operating income minus annual debt service. Total cash invested is everything the investor paid out of pocket: the down payment or equity check, closing costs, loan fees and any upfront capital work.
Because it is measured after debt service, it is a leveraged return. The same property can show a very different cash-on-cash return depending on how much is borrowed and at what rate, which is exactly what makes it useful for comparing financing options.
A worked example
A property produces $500,000 of NOI. Its loan costs $380,000 a year in debt service. The investor put in $1,500,000 of equity, closing costs and initial repairs. Cash flow is $120,000 and the cash-on-cash return is 8.0 percent.
If NOI were $300,000 against $360,000 of debt service on $1,000,000 invested, cash flow would be negative $60,000 and the return would be negative 6.0 percent. The calculator shows that case rather than hiding it, because a property that does not cover its debt service is the case a lender cares about most.
| Line | Amount |
|---|---|
| Net operating income | $500,000 |
| Less annual debt service | $380,000 |
| Pre-tax cash flow | $120,000 |
| Total cash invested | $1,500,000 |
| Cash-on-cash return | 8.0% |
Cash-on-cash vs cap rate and IRR
Cap rate is NOI over value and ignores financing, so it describes the property. Cash-on-cash describes the investor's equity in a single year, after financing. Internal rate of return and the equity multiple cover the whole hold, including sale proceeds and principal paydown, which cash-on-cash leaves out.
Comparing the two works only on the same cost basis. Measured against price alone, leverage is positive when the loan's constant is below the cap rate: borrowing costs less than the property yields. Cash invested here also carries closing costs and upfront capital work, so to judge the debt, compare the return with and without the loan on the same total cost rather than against the cap rate.
Why a lender reads the sponsor's number
Lenders do not size loans on cash-on-cash, but they read it in the sponsor's model. A thin or negative year-one cash yield means the sponsor is relying on growth or a sale to make the deal work, which raises the chance the sponsor stops funding shortfalls under stress. It is one more line in the credit memo next to DSCR and debt yield.
Questions lenders ask
- How is cash-on-cash return calculated?
- Divide annual pre-tax cash flow, which is NOI minus annual debt service, by the total cash invested. $120,000 of cash flow on $1,500,000 invested is an 8.0% cash-on-cash return.
- What is a good cash-on-cash return?
- There is no single benchmark. It depends on property type, leverage, interest rates and how much of the return is expected from growth or a sale. Compare it with the same deal bought without the loan, on the same total cost, to see whether leverage is helping, and with other deals of the same type and risk.
- What counts as cash invested?
- Every dollar the investor paid out of pocket to own the property: the equity or down payment, closing costs, lender fees, and upfront repairs or capital work. Loan proceeds are not cash invested.
- How is cash-on-cash different from ROI?
- ROI is a broad term that often includes appreciation and principal paydown over the whole hold. Cash-on-cash is narrower: one year of pre-tax cash flow over the cash put in.
- Can cash-on-cash return be negative?
- Yes. When debt service exceeds NOI, cash flow is negative and so is the return. The investor is then funding the shortfall out of pocket.
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