What is a good cash-on-cash return?
There is no universal good cash-on-cash return, because the number is as much a statement about the financing and the rate environment as about the property: the same building shows a different cash-on-cash at every loan size, coupon and amortization, with nothing about its operations changed. The honest benchmark is the loan constant. When the cap rate sits above the constant, leverage is positive and borrowing raises the cash return; when it sits below, every borrowed dollar lowers it, and a thin year-one figure is what honest arithmetic produces. It is also a pre-tax, single-year measure that ignores principal paydown, appreciation and the sale, so it says whether a deal pays you during the hold, not whether it performs overall.
Why there is no universal number
Cash-on-cash return is one year of cash flow after debt service divided by the cash invested, and both halves move with choices that have nothing to do with the building. More leverage shrinks the denominator and the numerator at once, so the ratio can go either way. A lower coupon fattens it. An interest-only period flatters it for exactly as long as it lasts. Comparing your deal to a figure remembered from a different rate environment compares the financing more than the real estate.
The number also depends on the deal's stage. A stabilized deal bought for income should produce cash from the first quarter. A value-add deal in year one, with units offline and a renovation running, often produces very little or less than nothing, on plan. Judging both against one benchmark misreads at least one of them.
The loan constant is the honest benchmark
The loan constant is annual debt service divided by the loan amount, and it is the number the cap rate has to beat for borrowing to help. When the cap rate is above the constant, each borrowed dollar earns more as real estate than it costs as debt service, and the levered cash return rises above the unlevered one. When the cap rate is below the constant, the relationship inverts: the loan consumes more cash per dollar than the building produces, and the levered return falls below the unlevered yield. That is negative leverage, and it is the standard condition whenever coupons sit above cap rates.
A worked illustration, on a $10,000,000 property producing $600,000 of NOI, bought with 2% of closing costs counted in the cash invested. All cash, the year-one yield is about 5.9%. With a 65% loan at 6.5% on thirty-year amortization, the constant is about 7.6%, above the 6.0% cap rate, and the cash-on-cash drops to 2.9%. The identical loan interest only at a 5.5% coupon puts the constant below the cap rate, and the return rises to about 6.6%. Three financings, one building.
| Financing | Loan constant | Year-one cash-on-cash |
|---|---|---|
| All cash | None | 5.9% |
| 65% loan, 6.5%, 30-year amortization | 7.6% | 2.9% |
| 65% loan, 5.5%, interest only | 5.5% | 6.6% |
Pre-tax, single-year, and blind to the exit
The metric excludes principal paydown, though the loan balance falls every month. It excludes appreciation and the sale, which usually carry most of a deal's total return. It is pre-tax, and depreciation means the after-tax cash in an owner's pocket can differ meaningfully from the pre-tax figure.
None of that is a flaw; it is the definition. Cash-on-cash answers one question, whether the deal distributes cash while you hold it, and for an investor living on distributions that can be the binding question. For total performance it belongs next to the internal rate of return and the equity multiple, not in place of them.
How to read a quoted number
Most inflated cash-on-cash figures are built in the denominator or the loan rather than in the income. Before comparing a quoted number to anything, establish four things.
- Which year it is. Year one on an amortizing loan, year one during interest only, and the year after the interest-only period ends are three different deals.
- What is in the denominator. Closing costs, financing costs, funded capital and initial reserves all belong in the cash invested, and each omitted line flatters the result.
- Whether reserves are above the line. A return computed before replacement reserves is not comparable to one computed after them.
- Whether the loan is real. A cash return computed on financing the sizing tests would not approve is a return on a loan that does not exist.
Reading it in a full underwriting
Altyst reports cash-on-cash for every year of the hold, next to the levered and unlevered internal rate of return, the equity multiple and the after-tax version, so the year-one figure is read in its series rather than alone. The free cash-on-cash calculator on this site does the single-year arithmetic without an account: it counts closing costs in the cash invested, derives the debt service from the loan quote, and shows how the return moves at the coupon plus and minus 50 and 100 basis points.
Related questions
What is a good cash-on-cash return on a rental property?
No single number survives across markets and rate environments. The productive comparison is against the deal's own alternatives: the unlevered yield you give up by borrowing, the loan constant that decides whether leverage helps, and the distribution you could buy elsewhere at similar risk. A figure that looks generous should be checked for an interest-only payment or a lightened denominator before it is admired.
Why is my cash-on-cash return lower than the cap rate?
Because the loan constant is above the cap rate, which is negative leverage: the loan consumes more cash per borrowed dollar than the building produces. The levered return then sits below the unlevered yield, and more leverage makes it worse. The deal can still work if income growth arrives, but the year-one arithmetic is telling the truth.
Is cash-on-cash return the same as ROI?
No. Cash-on-cash is a single year's pre-tax cash flow divided by the cash invested. Return on investment usually describes total profit over the whole hold, including principal paydown, appreciation and sale proceeds, which cash-on-cash deliberately excludes.
Does cash-on-cash return include principal paydown?
No. The numerator is cash flow after the full loan payment, so the principal portion reduces the return even though it is building equity. That equity shows up in the sale proceeds and the internal rate of return, not in cash-on-cash.
Can a good deal have a low cash-on-cash return?
Yes. A value-add deal in year one often shows a thin or negative figure on plan, and a deal entered at negative leverage can still perform if the underwritten growth arrives. The reverse also holds: an interest-only period can prop up a generous-looking figure on a deal that performs poorly once amortization begins.
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