Cash-on-Cash Return in Real Estate

What is cash-on-cash return in real estate?

Cash on cash return measures the annual pre‑tax cash flow from a property. The metric divides that cash flow by your total cash invested. The result shows the current period cash yield on your equity. The metric includes the impact of debt service. Cap rate does not include financing effects.

Formula

Cash on Cash Return = Annual Pre‑Tax Cash Flow ÷ Total Cash Invested

How do you calculate a cash-on-cash return step by step?

List your total cash invested.
Forecast your net operating income for the year.
Subtract your annual debt service to get pre‑tax cash flow.
Divide pre‑tax cash flow by total cash invested.
Express the result as a percentage.

Quick numeric example

Total cash invested equals 120,000.
Net operating income equals 24,000.
Annual debt service equals 14,000.
Pre‑tax cash flow equals 10,000.
Cash on cash return equals 10,000 ÷ 120,000 = 8.33%.

What goes into the cash-on-cash return formula?

Each item in the table appears in the formula inputs. Each description defines the term in plain language. The “Include” column shows whether to include the item in the base metric.

Item	Description	Include in Base
Annual pre‑tax cash flow	Net operating income minus annual debt service	Yes
Total cash invested	Down payment plus closing costs plus initial repairs	Yes
Reserves for capital items	Set aside for turns and big repairs	No
Taxes for the investor	Personal income tax impact	No

Why does a “sustainable” cash-on-cash return matter?

Headline cash-on-cash return can overstate distribution capacity. Recurring reserves reduce cash available for distributions. A sustainable version nets out recurring reserves before the ratio. This approach aligns the metric with actual distribution capacity.

Sustainable formula

Sustainable CoC = (Annual Pre‑Tax Cash Flow − Recurring Reserves) ÷ Total Cash Invested

How do debt terms change cash-on-cash return?

Interest rate changes alter annual debt service. Amortization length changes the principal paid each year. Interest only periods shift the timing of cash flow. Rate caps limit exposure on floating loans.

What does a side-by-side debt case comparison look like?

This table shows how common loan terms change results. The assumptions appear in the first row for clarity. The calculations use the exact numbers shown.

Assumptions

Equity equals 500,000.
Debt equals 1,000,000.
Net operating income equals 150,000.
Recurring reserves equal 15,000.
Gross potential rent equals 250,000.
Operating expenses equal 100,000.

Debt case	Annual debt service	Headline CF	Headline CoC	Recurring reserves	Sustainable CF	Sustainable CoC	DSCR	Breakeven occupancy
Fixed 6.5% at 30-year amortization	75,848	74,152	14.83%	15,000	59,152	11.83%	1.98	70.34%
Floating 7.5% interest only Year 1	75,000	75,000	15.00%	15,000	60,000	12.00%	2.00	70.00%
Fixed 6.5% at 25 year amortization	81,025	68,975	13.80%	15,000	53,975	10.80%	1.85	72.41%

Notes

DSCR equals NOI ÷ Annual debt service.
Breakeven occupancy equals (Operating expenses + Debt service) ÷ Gross potential rent.

How do DSCR and breakeven occupancy validate cash on cash return?

DSCR tests if cash flow can cover debt. A higher DSCR indicates a larger cushion. Breakeven occupancy shows the occupancy needed to avoid losses. A lower breakeven indicates stronger resilience.

Targets

Consider DSCR of at least 1.25 for stability.
Aim for breakeven occupancy below your trailing occupancy.

What is a good cash on cash return today?

The answer depends on risk and strategy. Lower risk deals often show lower current yield. Higher risk plans often start low and then rise after execution.

Context matrix

Strategy	Typical Year‑1 CoC	Risk note
Core stabilized multifamily	3% to 6%	Lower leverage and strong locations
Stabilized Class B	6% to 9%	Moderate leverage and stable rents
Value‑add light	0% to 4%	Yield ramps to 8% to 12% after stabilization
Value‑add heavy	0% to 2%	Yield rises after major renovations
Ground‑up development	0% during build	Cash flow begins at lease‑up

How should you stress test cash-on-cash return?

Add a 200 basis point rate shock on floating debt.
Test property taxes with a full reassessment after purchase.
Increase insurance by a regionally realistic percentage.
Raise utilities by a recent trailing inflation rate.
Reduce rents by a modest haircut that fits submarket volatility.
Recompute the ratio after each change and log the new result.

Simple stress test table template

Scenario	Change applied	New NOI	New debt service	New pre‑tax CF	New CoC
Base case	None
Rate +200 bps	Higher DS
Taxes reassessed	Higher OpEx
Insurance +15%	Higher OpEx
Rents −3%	Lower NOI

How do investor fees and waterfalls affect cash-on-cash return?

Project level cash-on-cash return can differ from LP level results. Fees reduce cash available for distribution to limited partners. Waterfalls change how much excess cash reaches limited partners. LP means limited partner. GP means general partner.

Simple LP example

Item	Amount
LP equity	1,000,000
Distributable cash before fees	100,000
Asset management fee	15,000
Cash available after fee	85,000
7% LP preferred return	70,000
Excess cash after pref	15,000
70/30 split on excess to LP/GP	10,500 to LP
LP total distribution	80,500
LP cash on cash return	8.05%

Observation

The project shows a 10% cash-on-cash return.
The LP receives an 8.05% cash-on-cash return.

How does a value add plan affect cash-on-cash return in year one?

Cash on cash return often dips during heavy renovations. Rents and occupancy often improve after renovation work. Distributions often rise after stabilization.

Typical year‑1 path for light value add

Months 1 to 3 show negative or near zero cash on cash return.
Months 4 to 6 show low single digits.
Months 7 to 9 show mid single digits.
Months 10 to 12 approach the stabilized target.

What mistakes make cash-on-cash return misleading?

Forgetting recurring reserves inflates results.
Ignoring tax reassessment understates expenses.
Omitting insurance increases understated risk.
Skipping asset management fees inflates LP returns.
Using pro forma rents without lease up lag inflates NOI.
Assuming constant occupancy hides variability.
Using annual numbers hides timing of interest only periods.

What checklist helps you calculate an audit ready cash on cash return?

Confirm the equity number includes closing costs.
Confirm the equity number includes initial repairs.
Use trailing twelve months for operating expenses.
Layer in a realistic tax reassessment after purchase.
Quote current insurance rather than last year’s bill.
Add recurring reserves for turns and major capital items.
Model debt service with real terms from a lender.
Compute DSCR along with the ratio.
Compute breakeven occupancy along with the ratio.
Run a rate and expense stress test before you publish the number.

How should you present cash on cash return to investors?

Label whether the figure is headline or sustainable.
Show the debt terms next to the ratio.
Show DSCR next to the ratio.
Show breakeven occupancy next to the ratio.
Include a one line note about your reserves policy.
Include a brief sensitivity table.

How does cash-on-cash return compare to cap rate and IRR?

Cap rate ignores financing effects. Cash on cash return includes the impact of debt service. IRR measures the time weighted return across the hold period. Cash on cash return measures current yield only.

Does principal paydown affect cash-on-cash return and return on equity?

Principal paydown does not change the numerator of cash on cash return in value add real estate. Principal paydown increases equity over time. Return on equity changes as equity changes.

What is the distribution coverage ratio and how is it related?

Distribution coverage ratio tests the safety of declared distributions. The formula divides distributable cash by declared distributions. A ratio above 1.0 suggests coverage for that period. Investors use it to judge payout safety.

This article is for educational purposes and is not tax, legal, or investment advice.

FAQs

Is cash on cash return the same as ROI?

No. ROI measures total profit against total cost over the full life of the deal.

Is cash on cash returned before or after taxes?

It is before taxes. It uses pre‑tax cash flow.

Can cash on cash return be negative?

Yes. Negative cash flow produces a negative ratio.

How often should I recalculate cash on cash return?

You should update it at least quarterly. You should also update it after major changes in expenses or rents.

How does cap rate relate to cash on cash return?

Cap rate ignores financing. Cash on cash return includes the impact of debt service.

Does principal paydown affect cash on cash return?

Principal paydown does not enter the numerator. Principal paydown changes equity and return on equity.