What Is Cash-on-Cash Return in Real Estate?

Introduction

If you’re trying to understand how much money a real estate deal actually puts in your pocket each year, one of the most important metrics to know is cash-on-cash return. It’s simple to calculate — but more powerful than it looks. In this post, we’ll walk through what cash-on-cash return is, how to calculate it, how it compares to other return metrics like IRR, and when it’s most useful in deal analysis.

Cash-on-Cash Return: The Definition

Cash-on-cash return measures how much cash flow a real estate investment generates relative to the equity you invested. It’s a snapshot of your annual income return — before taxes — as a percentage of the cash you put into the deal.

Cash-on-Cash Return = Annual Pre-Tax Cash Flow / Equity Invested

This is a great way to answer: “What return am I getting each year on the money I’ve put in?”

Example: Cash-on-Cash Return Step-by-Step

Let’s say you buy a stabilized apartment building and invest $300,000 of your own money. After paying all expenses and debt service, the property generates $24,000 in annual cash flow.

$24,000 / $300,000 = 0.08 or 8%

So, your cash-on-cash return is 8% — meaning you’re earning 8 cents per year for every dollar you invested in the deal.

How Cash-on-Cash Return Helps

Cash-on-cash return is especially useful in these situations:

• You’re comparing stabilized income-producing deals

• You want to understand how debt impacts your equity returns

• You need a quick gut-check on near-term performance

• You’re evaluating different capital structures

It’s not a “complete” return metric — we’ll get to that — but it’s a great year 1 benchmark and highly useful in interviews or case studies focused on cash flow analysis.

How Leverage Affects Cash-on-Cash Return

Cash-on-cash return is one of the clearest ways to see the impact of leverage (debt). Here’s a quick comparison:

Example A: All-Cash Purchase

• Purchase Price: $1,000,000

• NOI: $80,000

• Debt Service: $0

• Equity Invested: $1,000,000

• Cash-on-Cash Return: 8.0%

Example B: 70% Loan at 5% Interest

• Loan: $700,000

• Annual Debt Service: $35,000

• Equity Invested: $300,000

• Cash Flow: $80,000 - $35,000 = $45,000

• Cash-on-Cash Return: 15.0%

In this case, adding debt more than doubled your return on equity. But keep in mind: leverage also increases risk — if income drops or expenses rise, your equity return could fall quickly.

Key Takeaways

Cash-on-cash return is one of the simplest and most common real estate return metrics — and for good reason. It’s easy to calculate, easy to interpret, and gives a clear look at your income return on equity in a given year.

Just remember: it’s a snapshot, not the full story. Use it to understand cash yield, but always pair it with other metrics when evaluating the full performance of a deal.

Still not sure how to calculate cash-on-cash return in your model or case study? Book a 1-on-1 tutoring session and I’ll walk you through it step by step.