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Cash-on-cash return

Cash-on-cash return is the ongoing cash flow a property purchase produces, measured against the equity the investor has actually put in. It answers a simple question: how much money do I receive each year compared with what I paid in? The figure is calculated as cash flow after interest and principal payments, divided by the equity invested, and it is expressed as a percentage. In Norwegian it is called kontantavkastning, and it is one of the first measures investors look at when they assess a debt-financed purchase.

The difference from yield is that yield looks at the return on the property regardless of financing, while cash-on-cash return looks at the return on the equity after the loan has been serviced. A building with a 5% yield can give a far higher cash-on-cash return if it is debt-financed at an interest rate below the yield, because the loan lifts the return on the equity that remains. This effect is called gearing or leverage, and it is the whole point of using debt: a moderate loan-to-value ratio can lift a cash-on-cash return from 5% to well above 10%. Conversely, the cash-on-cash return falls quickly if the interest rate rises above the yield, and it can turn negative even when the property itself is profitable.

Cash-on-cash return differs from the internal rate of return (IRR) in that it only measures the ongoing cash flow, not the change in value at a future sale. Two purchases can have the same cash-on-cash return but very different total returns if one of them is expected to rise sharply in value. It also differs from the equity multiple, which measures how many times the equity has been earned back across the whole holding period. Cash-on-cash return is the snapshot; the others are the whole journey.

The measure is most useful for investors who care about ongoing income, and who want a stable payout from the property year by year. For them, the cash-on-cash return, together with the debt service coverage ratio, is a quick measure of whether the purchase actually puts money in your pocket after the bank has taken its share.

From Placepoint's glossary: Cash-on-cash return

More information: Eiendom Norge: Market Reports, Store norske leksikon: avkastning

Norwegian: Kontantavkastning.

Common questions we come across

What is cash-on-cash return?

Cash-on-cash return is the ongoing cash flow after interest and principal payments, divided by the equity invested, expressed as a percentage. It shows how much money the investor receives each year compared with the equity that has been put in.

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

Yield measures the return on the property regardless of financing. Cash-on-cash return measures the return on the equity after the loan has been serviced. Debt financing can lift the cash-on-cash return well above the yield, but it can also lower it if interest rates rise.

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

Cash-on-cash return only measures the ongoing cash flow. The internal rate of return (IRR) also includes the change in value at a future sale, and so measures the total return across the whole holding period.

Who is cash-on-cash return most useful for?

For investors who care about ongoing income and want a stable payout year by year. Together with the debt service coverage ratio, it gives a quick picture of whether the purchase puts money in your pocket after the bank.