Cash-on-Cash Return
Annual pre-tax cash flow divided by the cash invested, measuring the yield on your equity.
Cash-on-cash return measures the annual pre-tax cash flow a property produces against the actual cash an investor put in. Unlike cap rate, which ignores financing, cash-on-cash reflects the loan, so it shows the real yield on your equity after debt service.
The cash invested includes the down payment, closing costs, and any upfront capital improvements. The cash flow is what remains after operating expenses and debt service. Leverage magnifies the result: cheap debt can lift cash-on-cash well above the cap rate, while expensive debt can drag it below.
Cash-on-cash is a single-year snapshot and does not account for appreciation, principal paydown, or the eventual sale. Investors pair it with total return measures like internal rate of return to judge a deal over its full hold.
Formula
Cash-on-Cash Return = Annual Pre-Tax Cash Flow / Total Cash Invested
Worked Example
An investor puts $500,000 into a deal and nets $45,000 in annual cash flow after debt service. Cash-on-cash return = 45,000 / 500,000 = 9%.
Why It Matters
Cash-on-cash tells you what your money earns each year in the deal. It captures the effect of financing, so it is a practical gauge of whether a leveraged purchase actually pays you well.
Related Terms
Related Programs and Tools
Frequently Asked Questions
How is cash-on-cash different from cap rate?
Cap rate ignores financing and measures the all-cash return. Cash-on-cash accounts for the loan, so it shows the yield on the actual equity you invested.
What is a good cash-on-cash return?
It varies by deal and market, and it depends on your goals. Investors weigh it against risk, the cap rate, and the total return including appreciation and paydown.