What Is Cash-on-Cash Return in Commercial Real Estate?
Cash-on-cash return (CoC) is one of the most practical metrics in commercial real estate investing. It measures the annual pre-tax cash flow you receive relative to the total cash you invested in a property. Unlike cap rate or IRR, cash-on-cash return focuses exclusively on the cash you actually put into the deal and the cash you actually get back each year.
The formula is straightforward:
Cash-on-Cash Return = Annual Pre-Tax Cash Flow / Total Cash Invested x 100
For example, if you invest $500,000 in cash (down payment, closing costs, and renovations) and the property generates $50,000 in annual pre-tax cash flow after all expenses and debt service, your cash-on-cash return is 10%.
This metric answers a simple but powerful question: "What percentage return am I earning on the actual dollars I put into this deal?" That clarity makes it a favorite among investors evaluating whether a property justifies their capital commitment.
Cash-on-Cash Return at a Glance
6-8%
Core Assets
Stabilized, low-risk properties
8-12%
Value-Add
Moderate repositioning needed
12-20%+
Opportunistic
High risk, high reward deals
~4.5%
Risk-Free Rate
10-Year Treasury benchmark
How Do You Calculate Cash-on-Cash Return Step by Step?
Calculating cash-on-cash return requires two numbers: your total cash invested and your annual pre-tax cash flow. Here is the step-by-step process.
Step 1: Determine Total Cash Invested
Total cash invested includes every dollar you spend out of pocket to acquire and prepare the property. This typically includes the down payment, loan origination fees, closing costs, appraisal and inspection fees, legal fees, and any immediate capital improvements or renovations required before the property is operational.
For a $2,000,000 acquisition with a 75% LTV commercial loan, your down payment alone is $500,000. Add $30,000 in closing costs, $15,000 in origination fees, and $50,000 in deferred maintenance repairs, and your total cash invested is $595,000.
Step 2: Calculate Annual Pre-Tax Cash Flow
Start with gross potential income, subtract vacancy and credit loss, add any other income, then subtract all operating expenses to arrive at Net Operating Income (NOI). For a detailed breakdown of this calculation, see our NOI calculation guide. From NOI, subtract your annual debt service (principal and interest payments) to get annual pre-tax cash flow.
If your NOI is $160,000 and your annual debt service is $95,000, your annual pre-tax cash flow is $65,000.
Step 3: Apply the Formula
Cash-on-Cash Return = $65,000 / $595,000 = 10.92%
Cash-on-Cash Return Calculation Steps
Calculate Total Cash Invested
Down payment + closing costs + loan fees + renovation costs
Determine Gross Income
Rental income + other income - vacancy allowance
Calculate NOI
Gross effective income - all operating expenses
Subtract Debt Service
NOI - annual mortgage payments = pre-tax cash flow
Apply the Formula
Annual pre-tax cash flow / total cash invested x 100
Step 4: Validate Your Inputs
Verify that your income projections are based on actual lease agreements or comparable market rents. Confirm that operating expenses include property management, insurance, taxes, maintenance, utilities (if owner-paid), and reserves for capital expenditures. Use our commercial mortgage calculator to model different financing scenarios and see how debt service affects your cash-on-cash return.
Sample Cash-on-Cash Calculation Breakdown
| Line Item | Amount |
|---|---|
| Purchase Price | $2,000,000 |
| Down Payment (25%) | $500,000 |
| Closing Costs & Fees | $45,000 |
| Renovation Budget | $50,000 |
| Total Cash Invested | $595,000 |
| Net Operating Income (NOI) | $160,000 |
| Annual Debt Service | $95,000 |
| Annual Pre-Tax Cash Flow | $65,000 |
| Cash-on-Cash Return | 10.92% |
What Is a Good Cash-on-Cash Return by Property Type?
There is no single "good" cash-on-cash return that applies across all commercial property types. Return expectations vary based on asset class, risk profile, market conditions, and financing structure. However, experienced investors generally use the following benchmarks.
Core stabilized assets in primary markets, such as Class A multifamily or credit-tenant retail, typically yield 6% to 8% cash-on-cash returns. These properties trade at lower yields because they carry lower risk, stable occupancy, and predictable cash flows.
Value-add properties that require repositioning, lease-up, or moderate renovations generally target 8% to 12% cash-on-cash returns to compensate for the additional risk and management intensity. Investors pursuing these deals through bridge loan financing accept higher carrying costs in exchange for the upside potential.
Opportunistic investments, including ground-up development, major repositioning, and distressed acquisitions, may target 12% to 20% or higher, though many of these deals produce negative cash flow in early years before stabilization.
Average Cash-on-Cash Returns by Property Type
Class A Multifamily
7
Value-Add Multifamily
9.5
Industrial
8.5
Self-Storage
11
Retail (NNN)
7.5
Office (Class B)
9
Mixed-Use
8
Self-storage and industrial properties have been among the strongest performers in recent years, often delivering cash-on-cash returns of 9% to 14% for well-located, stabilized assets. Multifamily remains popular for its combination of consistent cash flow and appreciation potential, typically landing in the 7% to 10% range for value-add deals in secondary markets.
Key principle: A "good" return is one that adequately compensates you for the risk you are taking. An 8% return on a fully leased, Class A office building with investment-grade tenants may be more attractive than a 14% return on a poorly located strip center with month-to-month leases.
Investor Insight
A 'good' cash-on-cash return always depends on context. Compare your projected return against the risk-free rate (Treasury yields), alternative investments, and the specific risk profile of the property. A stabilized NNN property at 7% may be superior to a speculative value-add deal at 12% depending on your investment goals.
How Does Leveraged vs. Unleveraged Cash-on-Cash Return Compare?
Understanding the difference between leveraged and unleveraged cash-on-cash return is critical for evaluating how financing amplifies (or diminishes) your returns.
Unleveraged cash-on-cash return assumes you purchase the property entirely with cash, using no debt. The formula becomes:
Unleveraged CoC = NOI / Total Purchase Price x 100
This is essentially the same as the cap rate for an all-cash purchase. For a detailed comparison, see our cap rate guide.
Leveraged cash-on-cash return accounts for debt service and uses only the equity portion you invested:
Leveraged CoC = (NOI - Annual Debt Service) / Total Cash Invested x 100
Here is where the power of leverage becomes clear. Consider a $2,000,000 property with $160,000 NOI (8% cap rate).
All-cash scenario: You invest $2,000,000 and receive $160,000 in cash flow. Your cash-on-cash return is 8.0%.
75% LTV scenario: You invest $595,000 (including closing costs) and receive $65,000 in cash flow after debt service. Your cash-on-cash return is 10.92%.
Leverage boosted your return from 8.0% to 10.92% because the cost of debt (let's say 6.5%) is lower than the property's yield (8.0%). This positive spread between property yield and borrowing cost creates what investors call "positive leverage."
Warning about negative leverage: If borrowing costs exceed the property's yield, leverage works against you. For example, if the same property had a 6% cap rate but your all-in borrowing cost was 7.5%, using debt would actually reduce your cash-on-cash return below what you would earn with an all-cash purchase. This scenario became common during periods of rapid interest rate increases.
Analyzing your DSCR ratio alongside cash-on-cash return helps ensure your financing structure is sustainable. Use our DSCR calculator to test different loan scenarios.
How Does Cash-on-Cash Return Compare to Cap Rate and IRR?
Investors often confuse cash-on-cash return with cap rate and IRR because all three measure investment performance. However, each metric answers a different question and serves a different purpose.
Cap Rate measures the property's unlevered yield based on its current price and NOI. It ignores financing entirely and focuses on property-level returns. Cap rate is best for comparing property values and assessing market pricing.
Cash-on-Cash Return measures the investor's levered annual cash yield based on actual cash invested and actual cash flow received. It incorporates financing and is best for evaluating the return on your specific investment.
IRR (Internal Rate of Return) measures the total annualized return over the entire holding period, including cash flow, appreciation, principal paydown, and the eventual sale. IRR accounts for the time value of money and is best for comparing investments with different holding periods and exit strategies.
Cap Rate vs. Cash-on-Cash Return vs. IRR
| Metric | What It Measures | Includes Financing? | Time Horizon | Best Used For |
|---|---|---|---|---|
| Cap Rate | Property yield on purchase price | No | Single year | Comparing property values |
| Cash-on-Cash | Cash yield on equity invested | Yes | Single year | Evaluating annual cash returns |
| IRR | Total annualized return | Yes | Full hold period | Comparing total investment returns |
| Equity Multiple | Total cash returned vs. invested | Yes | Full hold period | Measuring wealth creation |
| DSCR | Ability to service debt | Yes | Single year | Loan qualification and risk |
Consider this example: A property might have a 7% cap rate, generate a 10% cash-on-cash return due to favorable leverage, and project a 15% IRR over five years when factoring in 3% annual appreciation and principal reduction. Each number tells you something different about the investment.
The most sophisticated investors use all three metrics together. Cap rate tells them if the property is fairly priced relative to the market. Cash-on-cash return tells them if the annual cash flow justifies their equity investment. IRR tells them if the total return over the holding period meets their target.
Pro Tip: Use All Three Metrics Together
Cap rate tells you if the property is priced fairly. Cash-on-cash return tells you if the annual cash flow justifies your equity. IRR tells you if the total return over your hold period meets your target. Relying on any single metric can lead to blind spots in your analysis.
How Does Financing Structure Affect Your Cash-on-Cash Return?
Financing structure has a dramatic impact on cash-on-cash return. Every variable in your loan terms, from interest rate to amortization period to LTV ratio, directly affects either your total cash invested or your annual debt service, and therefore your cash-on-cash return.
Interest Rate Impact
On a $1,500,000 loan with 25-year amortization, the difference between a 6.0% and 7.5% interest rate changes your annual debt service by approximately $16,200. That translates directly to a change in your cash-on-cash return.
Amortization Period Impact
Longer amortization periods reduce monthly payments and increase cash flow. A 30-year amortization versus a 20-year amortization on a $1,500,000 loan at 6.5% reduces annual debt service by roughly $18,000, potentially adding 2 to 3 percentage points to your cash-on-cash return.
LTV Ratio Impact
Higher LTV means less cash invested (smaller denominator) but more debt service (smaller numerator). As long as you have positive leverage, higher LTV increases your cash-on-cash return. Moving from 65% LTV to 80% LTV can significantly boost your CoC, but it also increases risk and may affect your DSCR requirements.
Interest-Only Periods
Many bridge loans and transitional loans offer interest-only periods. Eliminating principal payments during this period can dramatically boost near-term cash-on-cash return, sometimes by 3 to 5 percentage points.
How Financing Variables Affect Cash-on-Cash Return
| Variable | Change | Effect on CoC Return | Magnitude |
|---|---|---|---|
| Interest Rate | 6.0% to 7.5% | Decreases | ~2-3 percentage points |
| Amortization | 20-year to 30-year | Increases | ~2-3 percentage points |
| LTV Ratio | 65% to 80% | Increases (with positive leverage) | ~1-3 percentage points |
| Interest-Only Period | Added 2-year IO | Increases (temporarily) | ~3-5 percentage points |
| Loan Term | 5-year to 10-year | Minimal direct impact | Affects refinance risk |
For investors seeking to optimize their financing structure for maximum cash-on-cash return, Clearhouse Lending offers acquisition loans and permanent loans tailored to commercial investment properties. Contact our team to discuss which loan structure best fits your investment strategy.
What Are Common Mistakes When Calculating Cash-on-Cash Return?
Even experienced investors make calculation errors that lead to inflated or misleading cash-on-cash return projections. Here are the most common pitfalls.
Underestimating total cash invested. Many investors only count the down payment and forget to include closing costs, loan fees, required reserves, and immediate capital expenditures. This understates your denominator and inflates your return.
Using pro forma income instead of actual income. Projecting future rents at market rate when existing leases are below market will overstate your cash flow. Always calculate cash-on-cash return based on current in-place income for Year 1 analysis.
Ignoring vacancy and credit loss. Assuming 100% occupancy with no collection losses is unrealistic. Use a minimum 5% vacancy factor for stabilized properties and higher for value-add or transitional assets.
Forgetting capital reserves. Even if you do not spend money on capital improvements in Year 1, you should reserve for future needs. Industry standard is $250 to $500 per unit for multifamily, or 1% to 3% of gross income for commercial properties.
Confusing pre-tax and after-tax returns. Cash-on-cash return is traditionally calculated on a pre-tax basis. Including tax benefits like depreciation in the numerator mixes two different concepts and makes comparisons unreliable.
Common Calculation Mistakes and Their Impact
1-3%
Missing Closing Costs
Overstates CoC return by 1-3 points
5-10%
No Vacancy Factor
Overstates income significantly
1-3%
No Cap-Ex Reserves
Ignores future capital needs
Varies
Pro Forma vs. Actual
Can overstate returns by 20%+
Not updating projections annually. Cash-on-cash return changes every year as rents increase, expenses change, and loan balances decrease. Sophisticated investors recalculate annually and track the trend over their holding period.
How Can You Improve Cash-on-Cash Return on an Existing Property?
If your current cash-on-cash return falls below your target, there are several strategies to improve it, organized by their impact and feasibility.
Revenue Enhancement Strategies
Increase rents to market rate as leases expire. Add ancillary income sources such as parking fees, storage units, vending machines, laundry facilities, or billboard leases. Reduce vacancy through improved marketing, tenant retention programs, and competitive lease terms. For multifamily properties, consider implementing a ratio utility billing system (RUBS) to recover utility costs.
Expense Reduction Strategies
Renegotiate property management fees, insurance premiums, and service contracts. Appeal property tax assessments if comparable properties suggest over-assessment. Invest in energy-efficient upgrades that reduce utility costs, such as LED lighting, smart thermostats, and low-flow water fixtures.
Financing Optimization Strategies
Refinance into a lower interest rate or longer amortization when market conditions allow. Consider a permanent loan with a 30-year amortization to maximize cash flow. If you have significant equity, a cash-out refinance can reset your invested capital calculation, though this resets your return basis rather than truly improving property performance.
Strategies to Improve Cash-on-Cash Return
Raise Rents to Market
Adjust below-market leases at renewal to capture current rates
Add Ancillary Income
Parking, storage, laundry, vending, and utility reimbursements
Reduce Operating Expenses
Renegotiate contracts, appeal taxes, improve energy efficiency
Optimize Financing
Refinance to lower rate or longer amortization period
Reduce Vacancy
Improve marketing, offer competitive terms, retain quality tenants
The most impactful improvements typically combine revenue increases with strategic refinancing. A 5% rent increase combined with a refinance from a 7.0% to 6.25% rate can improve cash-on-cash return by 3 to 5 percentage points depending on your leverage level.
What Are the Limitations of Cash-on-Cash Return?
Cash-on-cash return is a valuable metric, but relying on it exclusively can lead to poor investment decisions. Understanding its limitations is essential.
It only measures one year. Cash-on-cash return is a snapshot of a single year's performance. It does not account for property appreciation, principal paydown, or changes in cash flow over time. A property with a mediocre Year 1 cash-on-cash return might deliver excellent total returns through appreciation.
It ignores the time value of money. A dollar received today is worth more than a dollar received five years from now. Cash-on-cash return does not discount future cash flows, which is why IRR is the preferred metric for total return analysis.
It is easily manipulated by financing terms. Interest-only periods, high LTV loans, and seller financing can inflate cash-on-cash return without improving the underlying property economics. Always evaluate the property's cap rate independently.
It does not account for risk. Two properties can have identical cash-on-cash returns but vastly different risk profiles. A single-tenant net lease property and a 20-unit value-add apartment complex might both show 9% CoC, but their risk characteristics are completely different.
It excludes tax implications. Depreciation, 1031 exchanges, cost segregation, and other tax strategies significantly affect after-tax returns but are not reflected in standard cash-on-cash calculations.
For a complete investment analysis, pair cash-on-cash return with cap rate, IRR, equity multiple, and DSCR. This comprehensive approach gives you a full picture of both annual performance and long-term value creation.
Frequently Asked Questions About Cash-on-Cash Return?
What is the difference between cash-on-cash return and ROI?
ROI (Return on Investment) typically measures total return including appreciation, while cash-on-cash return measures only annual cash flow relative to cash invested. Cash-on-cash return is a more focused metric that isolates the income component of your investment performance, making it ideal for comparing annual cash flow yields across different properties and financing structures.
Is a 10% cash-on-cash return good for commercial real estate?
A 10% cash-on-cash return is generally considered strong for stabilized commercial properties. Core assets in primary markets often yield 6% to 8%, while value-add properties target 8% to 12%. The "right" return depends on your risk tolerance, market conditions, and the property's risk profile. In a high interest rate environment, even 8% can be excellent.
How does cash-on-cash return change over time?
Cash-on-cash return typically improves over the holding period as rents increase, the loan amortizes (reducing principal balance and sometimes allowing refinancing), and operational improvements take effect. However, it can also decline if expenses rise faster than income or if market conditions deteriorate.
Should I use cash-on-cash return or cap rate to evaluate a deal?
Use both. Cap rate evaluates the property's value independent of financing, while cash-on-cash return evaluates your specific investment including how you finance it. A property with a 7% cap rate might deliver anywhere from 5% to 12% cash-on-cash return depending on your loan terms, down payment, and closing costs.
Can cash-on-cash return be negative?
Yes. If your annual debt service and operating expenses exceed your gross income, you will have negative pre-tax cash flow and a negative cash-on-cash return. This is common during lease-up periods, major renovations, or when properties are over-leveraged.
How do interest rates affect cash-on-cash return?
Higher interest rates increase debt service, which reduces annual pre-tax cash flow and lowers cash-on-cash return. A 1% increase in interest rate on a $1,500,000 loan can reduce annual cash flow by $10,000 to $15,000, potentially dropping your cash-on-cash return by 2 to 3 percentage points.
What is the minimum cash-on-cash return I should accept?
Most investors set a minimum threshold of 7% to 8% for stabilized properties. Your minimum should exceed the risk-free rate (current Treasury yields) by a meaningful margin to compensate for the illiquidity, management burden, and risk of real estate. Contact our lending team to model different scenarios and find the financing structure that meets your return requirements.
How do I calculate cash-on-cash return with a refinance?
After a refinance, recalculate using your new total cash invested (original investment minus any cash-out proceeds) and your new annual cash flow (based on new debt service). If you execute a cash-out refinance that returns your entire original investment, your cash-on-cash return becomes theoretically infinite, which is why many investors refer to this as an "infinite return" strategy.
Sources and References?
- National Council of Real Estate Investment Fiduciaries (NCREIF), "Property Index Returns," Q3 2024. ncreif.org
- Freddie Mac Multifamily, "Apartment Investment Market Index," 2024. freddiemac.com
- CBRE Research, "U.S. Cap Rate Survey," H2 2024. cbre.com
- Mortgage Bankers Association, "Commercial/Multifamily Mortgage Debt Outstanding," Q3 2024. mba.org
Ready to optimize your cash-on-cash return with the right financing structure? Contact Clearhouse Lending for a personalized commercial loan consultation and discover how our loan programs can help you achieve your target returns.