Cash-on-Cash Return: How to Calculate and Evaluate Real Estate Returns
Cash-on-cash return measures the annual pre-tax cash flow from a real estate investment divided by the total cash invested. Learn the formula, see worked examples, understand what constitutes a good return by property type, and how it compares to cap rate and IRR.
Krish
Real Estate Investor & Founder of UWmatic
What Is Cash-on-Cash Return?
Cash-on-cash return is the annual pre-tax cash flow from a real estate investment divided by the total cash invested. It measures the percentage yield an investor earns on the actual money they put into a deal, accounting for financing. Unlike cap rate, which ignores leverage, cash-on-cash return shows what your equity is actually earning each year. It is the most practical metric for investors evaluating their annual income from a property.
The formula is: Cash-on-Cash Return = Annual Pre-Tax Cash Flow / Total Cash Invested x 100
How to Calculate Cash-on-Cash Return
Example: 24-Unit Apartment Building
| Component | Amount |
|---|---|
| Purchase Price | $2,800,000 |
| Down Payment (25%) | $700,000 |
| Closing Costs | $65,000 |
| Renovation Budget | $85,000 |
| Total Cash Invested | $850,000 |
| Income/Expense | Annual Amount |
|---|---|
| Net Operating Income (NOI) | $196,000 |
| Annual Debt Service | ($138,000) |
| Annual Pre-Tax Cash Flow | $58,000 |
Cash-on-Cash Return = $58,000 / $850,000 = 6.82%
What Is a Good Cash-on-Cash Return?
| Investment Type | Typical CoC Range |
|---|---|
| Stabilized Class A Multifamily | 4% -- 6% |
| Class B/C Value-Add Multifamily | 6% -- 10% |
| Mobile Home Parks | 8% -- 12% |
| Small Residential (1-4 Units) | 5% -- 10% |
| BRRRR Strategy (Post-Refinance) | 10% -- Infinite |
Context matters more than absolute numbers. A 5% cash-on-cash return in a high-appreciation market like Austin may outperform a 10% return in a flat market when total returns (appreciation plus cash flow) are considered.
Cash-on-Cash vs. Other Metrics
Cash-on-cash return has limitations. It only measures one year's cash flow, ignores appreciation, principal paydown, and tax benefits, and doesn't account for the time value of money. Use it alongside cap rate (unlevered yield), IRR (time-weighted total return including exit), and equity multiple (total return over the hold period) for a complete picture.
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Frequently Asked Questions
Why is my cash-on-cash return different from the cap rate?
Can cash-on-cash return be negative?
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