Cash-on-cash return is a real estate investment return metric calculated as annual pre-tax cash flow divided by the total cash invested, measuring return specifically on the investor's actual equity contribution rather than the total property value. Unlike cap rate, which measures unleveraged property-level return, cash-on-cash return accounts for the effect of financing.
Cash-on-cash return formula example
| Component | Example figure |
|---|---|
| Annual pre-tax cash flow (after debt service) | $80,000 |
| Total cash invested (down payment + closing costs) | $1,000,000 |
| Cash-on-cash return | 8.0% |
What to watch for before committing
Pre-tax vs after-tax clarity
Confirm whether a cited cash-on-cash return figure is pre-tax or after-tax, since this significantly affects the number and its comparability.
Full cash investment inclusion
Ensure the total cash invested figure includes all relevant costs — down payment, closing costs, and any immediate capital expenditures, not just the down payment alone.
Leverage impact on risk
Recognize that cash-on-cash return, being a leveraged metric, reflects both higher potential returns and higher risk compared to unleveraged cap rate.
Year-one vs stabilized calculation
Understand whether the cited cash-on-cash return reflects year-one performance or a stabilized, ongoing figure, since these can differ meaningfully.
Debt service assumptions
Verify the debt service assumptions (interest rate, amortization) used in the cash flow calculation are realistic and current.
Comparison consistency across deals
When comparing multiple investment opportunities, ensure cash-on-cash calculations use consistent methodology across all options.
When you need to know this
- Evaluating leveraged investment returns — understanding the actual return on your specific equity contribution
- Comparing financed vs all-cash purchase scenarios — assessing how leverage affects your specific return profile
- Underwriting a specific acquisition — calculating expected return based on your actual financing structure
- Comparing multiple investment opportunities — using a consistent, leverage-adjusted metric for comparison
Frequently asked questions
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