In Practice
People ask what is cash on cash return because owners and investors bring it up all the time. It measures the cash they receive each year against the cash they invested, after paying the mortgage. It answers a simple owner question: for every dollar I put in, how many dollars come back this year?
You will not calculate it for a living as an on-site manager, but your numbers feed it. Rent collected, expenses controlled and capital spending all change the cash the property sends to the owner. When an owner asks you why distributions are down, cash-on-cash is often the lens they are using.
An example: an investor puts 1,000,000 dollars of cash into a purchase. After operating expenses and loan payments, the property produces 80,000 dollars of cash in a year. The cash-on-cash return is 8 percent.
A common mistake is mixing it up with cap rate. Cap rate ignores the loan. Cash-on-cash accounts for it. Another is forgetting that capital spending and reserve deposits reduce the cash that actually reaches the owner, so a rosy number on paper can still feel thin in the bank.
How to calculate it
Cash-on-cash return = annual pre-tax cash flow divided by total cash invested. Pre-tax cash flow is net operating income minus debt payments (and often minus required reserves). Example only: 80,000 dollars of cash flow divided by 1,000,000 dollars invested is 8 percent.
Not to Be Confused With
Cap rate uses NOI and the property's price, with no loan involved. Cash-on-cash uses cash left after loan payments and the investor's own cash.
Cash-on-Cash Return: Common Questions
What is a good cash-on-cash return?
There is no single answer. Many investors look for a return that beats safer options and fits their risk, and the target varies by market, property type and strategy.
What is the difference between cash-on-cash return and cap rate?
Cap rate compares NOI to the price and ignores financing. Cash-on-cash compares cash flow after debt to the cash the investor put in.
