Cash-on-cash return
Also called Cash yield, Cash-on-cash.
Cash-on-cash return is a year's cash flow after debt service divided by the total equity invested. It measures the current income yield on the money actually at risk, ignoring appreciation and any eventual sale.
How it works
This is the measure most closely tied to what an investor experiences while holding the asset. IRR and equity multiple are only resolved at exit; cash-on-cash is the distribution cheque that either arrives or does not. For income-oriented investors it is frequently the binding constraint, and a deal with an attractive IRR built entirely on the sale can be unfinanceable to them regardless.
It is reported year by year rather than as one number, and the shape of the series carries most of the information. A value-add deal typically shows a thin or negative year one while units are being renovated, rising into the mid single digits by year three and beyond. A stabilised core deal shows a flat, high starting yield with modest growth. Averaging the series into a single figure hides which of those two you are being offered.
The denominator is where most of the errors live, and it should be all-in equity: purchase price less loan proceeds, plus closing costs, financing costs, funded capital and any initial reserves and working capital. Anything less overstates the return.
Formula
Cash-on-cash = cash flow after debt service / total equity invested- Cash flow after debt service is NOI less debt service less capital funded from operations
- Total equity is the down payment plus closing costs, financing costs, funded capital and initial reserves
- Reported per year. An average across the hold hides the shape of the series
Worked example
The sample property. Purchase price $55,900,000, loan $36,335,000, year-one NOI $3,020,000, interest-only debt service $2,307,272.
| Year-one cash flow after debt service | $712,728 |
|---|---|
| Equity as price less loan | $19,565,000 |
| Cash-on-cash on that basis | 3.64% |
| Plus closing costs, financing costs and reservesillustrative | $1,000,000 |
| All-in equity | $20,565,000 |
| Cash-on-cash on all-in equity | 3.47% |
Seventeen basis points of difference from one omitted line. On a deal being marketed against a 3.5 percent minimum current yield, that omission is the difference between clearing the screen and failing it.
The common mistake
Excluding closing costs and funded capital from the equity base
Using purchase price less loan amount as the equity denominator ignores acquisition costs, lender fees, legal, title, funded renovation capital and initial reserves, all of which are money the investor actually wired. Every one of those omissions inflates the reported yield. The rule is simple: the denominator is every dollar that left the investor's account, and if the sources and uses statement balances, that number is already sitting in it.
Related terms
- Internal rate of returnThe internal rate of return is the discount rate at which the net present value of a deal's cash flows equals zero. It expresses a full investment, including the timing of every contribution and distribution, as a single annualised percentage.
- Equity multipleThe equity multiple is total distributions divided by total equity contributed, expressed as a multiple. A 2.0x means an investor received two dollars back for every dollar put in, counting the original dollar.
- Debt service coverage ratioThe debt service coverage ratio is net operating income divided by annual debt service. A 1.25x means the property produces $1.25 of income for every $1.00 of principal and interest owed, so net operating income could fall by 20 percent before coverage reaches 1.00x and the loan stops being covered.
- Break-even occupancyBreak-even occupancy is the occupancy level at which a property's collections exactly cover its operating expenses and debt service, with nothing left over. Below it, the property consumes cash instead of producing it.
- Loan constantThe loan constant is annual debt service divided by the original loan balance, expressed as a percentage. It combines the interest rate and the amortisation schedule into one number, which is what makes it the right rate to compare against a cap rate.
- Cap rateA cap rate is a property's net operating income divided by its value or price, expressed as a percentage. It is the unlevered first-year yield on the purchase price and the standard shorthand for what a market is paying for a stream of property income.
Every figure, traced to its source
Altyst computes these in exact decimal arithmetic, not with a language model, and clicking any number shows the formula behind it.