Cash-on-Cash Return

Cash-on-cash return measures the annual pre-tax cash flow an investment produces relative to the actual cash equity invested, ignoring financing leverage's effect on total return and appreciation. It is the simplest way investors gauge near-term income yield on their invested capital, distinct from IRR or equity multiple, which account for the full hold period and eventual sale proceeds.

Formula: Cash-on-Cash Return = Annual Pre-Tax Cash Flow ÷ Total Cash Invested × 100

Cash-on-cash return is popular with investors because it's simple, immediate, and directly answers 'what yield am I earning on the cash I actually put in this year' — as opposed to metrics like cap rate (which ignores financing entirely) or IRR (which requires projecting the full hold period and exit).

Because cash-on-cash is calculated after debt service, it captures the benefit of leverage directly: a well-levered deal with a low-cost loan and healthy spread over the cap rate can produce a cash-on-cash return meaningfully higher than the property's unlevered cap rate, a dynamic often called 'positive leverage.'

The main limitation of cash-on-cash return is that it's a single-year snapshot — it doesn't capture appreciation, loan paydown, or the eventual sale proceeds, so investors evaluating a full-hold-period decision typically pair cash-on-cash with IRR and equity multiple to get the complete return picture.

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