Cash-on-Cash Return
Also called: CoC, Cash yield, Equity dividend rate
Cash-on-cash return is the annual pre-tax cash flow after debt service divided by the total equity invested, measuring the yearly cash yield an investor actually receives on their money.
Where cap rate describes the property and IRR describes the whole hold, cash-on-cash describes a single year from the investor's seat. It is the number a limited partner feels, because it approximates the distribution check.
It is highly sensitive to leverage and loan structure. An interest-only period raises cash-on-cash meaningfully while it lasts, then drops it when amortization begins, which is why year one cash-on-cash on a bridge deal often overstates the stabilized yield.
How to calculate cash-on-cash return
Cash-on-Cash = Annual Cash Flow After Debt Service / Total Equity InvestedWorked example
A deal with $2,000,000 of equity in its third year:
- Net operating income
- $430,000
- Annual debt service
- ($295,000)
- Cash flow after debt service
- $135,000
Rules of thumb
- Read year one and stabilized cash-on-cash separately. Value-add deals frequently show near zero in year one by design.
- If cash-on-cash exceeds the cap rate, the deal has positive leverage. If it is below, the debt is diluting returns.
Calculate cash-on-cash return
Related terms
- Internal Rate of Return (IRR)
The internal rate of return is the annualized discount rate at which the present value of a deal's cash flows equals zero, making it the time-weighted compound annual return on invested equity.
- Debt Service Coverage Ratio (DSCR)
The debt service coverage ratio is net operating income divided by total annual debt service, and it measures how many times a property's income covers its loan payments.
- Interest-Only Period
An interest-only period is a stretch at the start of a loan term during which the borrower pays only accrued interest and no principal, lowering debt service and raising early cash flow.