Real estate

What is Cash on Cash Return -Ultimate Guide 2023

Written By Urban Real Estate Center
Last Updated: Dec 26, 2022 •

Investing in real estate can be a great way to build wealth, and cash-on-cash return is an important metric for measuring the success of your investments. But what exactly is cash on cash return? Many investors need help understanding this key concept but fear not! 

We'll take you through everything you need to know about calculating cash-on-cash returns to ensure your real estate investments are successful. Whether you're a new or experienced investor, understanding the basics will help ensure that any property purchases you make result in long-term financial gains. Read on to learn more.


What is Cah-on-Cah Return?

Cash-on-Cash Return (CoC) is a metric used to measure the profitability of an investment, usually related to real estate. It is calculated by dividing the cash income generated from the investment over a specific period, such as a year or quarter, by the total cash of the amount invested in that property. The result is expressed as a percentage and helps investors understand how much money their capital has made for them relative to their original investment. 

Calculating CoC return indicates whether their investment is performing well and helps compare different investments against each other. For example, if two properties have identical income streams but one requires double the capital, the lower-cost property will have a higher CoC return than its counterpart. Consequently, it may be more desirable for an investor depending on their risk profile and personal preferences. 

CoC return should not be confused with the Internal Rate of Return (IRR), which measures all returns generated from an investment, including capital gains or appreciation. IRR does not consider up-front costs associated with acquiring the asset, such as taxes and fees associated with closing costs or repairs. When comparing different investments, accurately reflecting an investor's actual returns can be challenging. 

When looking at CoC return on investment, investors should ensure that they are comparing apples to apples; that is, similar investment properties in terms of size and location so that any differences in CoC are due solely to changes in rental income or costs associated with running/maintaining them rather than outside factors like location or age.

When calculating CoC return, investors should factor in local market conditions such as vacancy rates and rent prices to adjust their expectations accordingly. All these factors play a role in providing accurate information about the performance of an investment, and it can be easier to assess any venture's true profitability with them.


How to Calculate a Cash-on-Cash Return?

To calculate the cash-on-cash return, we need to subtract all operating costs (principal and interest payments, operating expenses, and property improvements) from the annual rental revenue. In this case, that would be $1.2 million - $750,000 = $450,000. 

Next, we divide that number by the total amount of equity invested. In our example, that would be $450,000 / $2.7 million = 16.7%. This is the cash-on-cash return for this deal for one year. It is important to note that this does not consider any appreciation or depreciation in the asset's value over time. The cash-on-cash return only considers rental income and other associated costs like principal, interest payments, and operating expenses.

Cash on cash return is a key metric used by real estate investors to assess the profitability of an investment opportunity since it measures how much money an investor will make back each year after deducting all associated costs from the total amount of equity they have invested in a project or property. It can help investors evaluate potential deals quickly without taking into account any potential appreciation of the asset or change in market values over time.

Here is another example that can tell you how to calculate cash on cash: 

Using the same scenario as previously mentioned, let's assume an investor purchases a property for $1 million, puts down a $100,000 cash payment, and obtains a loan for $900,000 to cover the remainder. Then, the investor pays out of pocket for ancillary costs, such as closing costs and repairs, which total $10,000. The investor decides to sell the property after one year for $1.1 million after paying $25,000 in loan payments, including a principal repayment of $5,000.

This means that the investor's total cash outflow was $135,000 [$100,000+$10,000+$25000]. The cash inflow would be their proceeds from selling the property less their loan balance - so in this case, it would be $205,000 ($1.1 million minus their remaining loan balance of $895K). To calculate the investor's cash-on-cash return (the ROI), divide their total cash inflows ($205K) by their total cash outflows ($135K) - this equals a 51.85% return on investment [($205K -$135K) ÷ $135K]. 


What Does Cash-on-Cash Return Tell You?

Cash-on-cash return is an important measure of the potential performance and success of a commercial real estate investment. It is an analysis tool used by investors to determine whether or not a particular property investment will generate enough cash flow to make it a viable option. This metric helps business owners and investors compare different properties and decide which one is the most lucrative for their specific needs.

Essentially, cash-on-cash return gives investors a snapshot of how much cash they can expect from the investment over its lifetime. This calculation looks at the total annual cash distributions from a given property and any related taxes or expenses. It then divides that figure by the total amount of cash invested, arriving at the return percentage.

By comparing different investments and doing this calculation, investors can easily identify which ones offer higher returns with less risk. Cash-on-cash return can also be used to evaluate rental properties; it's important to note that this metric doesn't take into account any appreciation or depreciation of a property's value.

Rather, it looks solely at current income generated from rental payments and other potential sources, such as late fees or penalty charges against tenants who don't pay on time. Investors should look at rental income and potential future appreciation when considering which property investments will likely yield the highest returns over time.

In addition, the cash-on-cash returns can help measure how well certain types of investments perform against industry standards or benchmarks. For example, suppose an investor was looking at three different commercial pieces of real estate in terms of their respective yields.

In that case, they could use this metric to compare them against each other and against industry averages. This would allow them to gauge more accurately whether they're making wise investment decisions. 

Overall, cash-on-cash return is an invaluable tool for evaluating potential real estate investments. It allows investors to easily compare different opportunities based on their expected income streams relative to other similar investments in the area.

However, it is important to note that this metric does not consider any appreciation or depreciation in value over time, so investors must consider these factors when deciding where best to invest their money for maximum returns on their investments.


Are Cash-on-Cash Return and ROI Identical?

No, cash-on-cash return and ROI are not identical when debt is used in a real estate transaction. Cash-on-cash return measures the return on the actual cash invested and provides a more accurate analysis of the investment's performance compared to ROI. ROI looks at the total return, including the debt burden, making it difficult to measure true returns accurately. 

When using cash-on-cash return to measure the success of an investment, you are essentially looking at a property's ability to generate income with minimal money down. The formula for calculating cash-on-cash return is Net Operating Income (NOI) divided by Total Investment (Cost + Loans). This formula gives investors a better sense of how much money they can make after all expenses have been paid off and debts have been accounted for. 

On the other hand, Return on Investment (ROI) considers both principal and interest payments from mortgages or other loans associated with the investment property to calculate total returns versus costs incurred. With this approach, investors would most likely want to look at their annual returns relative to their original upfront cost and any additional costs associated with taking out a loan.

While this approach works well for long-term investments with enough funds available to cover debt service obligations, it may be better when looking at investments with smaller upfront costs where debt financing may have been used. 

In conclusion, while Cash-on-Cash Return and ROI both measure the success of a real estate investment, they do so in different ways; Cash-on-Cash Return provides investors with an understanding of their true returns on their initial capital investments, while ROI looks at total returns, including principal and interest payments associated with any debts incurred.



Returns are what matter the most when assessing an investment. The higher the return, the more money you make (or lose). Different types of investments will have different returns. For example, stocks tend to be more volatile but offer a higher potential return than bonds. Understanding your options and how each can impact your bottom line is important.

Regarding real estate investing, cash on cash return is king. This metric tells you how much cash flow you're generating relative to the amount of money you've invested in a property. Suppose you're looking for ways to improve your investment strategy or assess new opportunities. This guide will provide everything you need to know about calculating and interpreting cash on cash return. Thanks for reading.


Urban Real Estate Center

Discover how to calculate Cash on Cash Return, a key metric real estate investors use. Learn how to use this important cash flow measure to evaluate potential investments & maximize your returns.