Question 1

How do I calculate cash-on-cash return?

Accepted Answer

Cash-on-Cash Return = Annual Pre-Tax Cash Flow ÷ Total Cash Invested. Annual pre-tax cash flow = NOI minus debt service (mortgage payments). Total cash invested = down payment + closing costs + any upfront capital improvements. For example, if you invested $200,000 and the property generates $14,000 in annual cash flow after debt service, your CoC return is 7%.

Question 2

What is a good cash-on-cash return for real estate?

Accepted Answer

Benchmarks vary by market and asset type, but a 6-10% cash-on-cash return is generally considered solid for residential rental properties. In high-cost markets with strong appreciation (coastal cities), 3-5% CoC is common — investors accept lower current yield for appreciation upside. Value-add deals targeting 8-12%+ CoC are typical in secondary markets. Below 4% is often considered too thin for leveraged investments.

Question 3

What is the difference between cash-on-cash return and IRR?

Accepted Answer

Cash-on-cash return measures annual cash yield on equity — it's a snapshot metric, simple to calculate, and ignores both appreciation and time value of money. IRR (Internal Rate of Return) accounts for all cash flows over the entire holding period, including the sale proceeds — making it a more complete picture of total investment performance. Use CoC to evaluate current income; use IRR to evaluate total return including exit.

Question 4

How do I compare cash-on-cash returns across deals in a chart?

Accepted Answer

A grouped bar chart works well for comparing multiple deals or properties side by side. Sort properties from highest to lowest CoC to make the ranking immediate. If showing the same property across multiple years, a line chart shows how the return has evolved as rents and debt service have changed. Always note whether figures are pre-tax or after-tax — the distinction matters for institutional LP reporting.

Question 5

How do investors use cash-on-cash return in acquisition decisions?

Accepted Answer

CoC return sets the baseline for whether a deal generates acceptable current income. Most real estate investors set a minimum CoC threshold (e.g., 6%) before analyzing a deal further. If a deal doesn't meet the minimum, the acquisition price, financing terms, or projected rents need to change. For value-add deals, investors often underwrite a low initial CoC (3-5%) that increases significantly once improvements are made and rents are raised.

Cash-on-Cash Return Chart

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FAQ: Cash-on-Cash Return Chart