What Cash-on-Cash Return Really Tells You

There are many metrics you can use to understand how well your investment is doing. One of the most popular metrics in real estate is cash-on-cash return, a relatively simple metric.

What is a Cash-On-Cash Return?

A cash-on-cash return, also known as a cash yield, is a metric commonly used in commercial real estate investing. It is a rate of return that calculates the cash income earned on cash invested in a property, generally on a pre-tax basis. In real estate transactions, it often measures the annual return the investor received on a property relative to the amount of mortgage paid in the same year.

Cash-on-cash returns are often used in real estate transactions, especially in transactions that involve debt. They are considered a relatively easy metric to understand, and they can be used to set a target for projected earnings and expenses.

There are major differences between the cash-on-cash return and other common return rate metrics:

Return on equity vs. cash-on-cash return: The return on equity measures your cash flow against your equity in the investment, not your initial investment. Your equity will typically change from year to year, but your initial investment will not change. The return on equity will almost always decrease over the years, even if the cash-on-cash return stays the same.
IRR vs. cash-on-cash return: The IRR measures the annualized return to an investor based on all net cash flows received during the duration of an investment, not just the return based on the pre-tax cash flow for a given year. The formula for the IRR is much more complex than the cash-on-cash return formula.
ROI vs. cash-on-cash return: The ROI is typically calculated for the lifetime of the investment, while the cash-on-cash return only measures the return for a single year or period of time. Also, the actual cash return on investment will differ from the standard ROI in the same time period when debt is included in the transaction. Many investors consider cash-on-cash return to be the more meaningful analysis of an investment’s performance.

How Do You Calculate Cash-On-Cash Return?

The formula for cash-on-cash return in a given year looks fairly simple at first glance:

However, there are many variables that go into the annual pre-tax cash flow portion of this equation. Your cash flow is based on the annual income you receive from the property (including rent) after subtracting operating expenses and mortgage payments. Some people like to include equity gains from principal payments as a form of income in this calculation.

For example, let’s say you purchase a $1 million property with a $100,000 down payment. You also pay $20,000 in insurance, closing costs, and maintenance out of pocket. After a year, you will have paid another $30,000 in loan payments with $5,000 going to the principal. You also expect to receive $50,000 in rent payments and have no vacancies. At this point, you plan to sell the property and expect to get $90,000 more than the price you purchased it for.

In this case, your annual pre-tax cash flow is ($50,000 + $90,000 + $5,000) – ($20,000 + $30,000) = $95,000, assuming you count your increased equity from principal payments as income. Your total cash investment is $100,000. According to the formula, your cash-on-cash return is forecast to be $95,000 / $100,000 = 0.95, or 95%.

If you choose not to count your increased equity from principal payments, your annual pre-tax cash flow is ($50,000 + $90,000) – ($20,000 + $30,000) = $90,000. As a result, you end up calculating a cash-on-cash return of 90%.

Most people do not consider appreciation when calculating the cash-on-cash return calculation until that appreciation is realized through a sale. In this example, if you do not sell the property, your pre-tax cash flow is forecast to be ($50,000 + $5,000) – ($20,000 + $30,000) = $5,000. The cash-on-cash return calculation will give you a much lower number, 5%, until you sell the property.

What is a Good Cash-On-Cash Return?

There is no general rule of thumb for a good cash-on-cash return. Your ideal return depends on your investment objectives and the market you are in, among other factors.

If you are investing in a growing or appreciating market, a property with a low cash-on-cash return may still be an excellent investment due to projected appreciation. An investor who prioritizes monthly cash flow may look for an 8 to 12% cash-on-cash return or more, while an investor looking for higher appreciation may prefer properties with a 5% cash-on-cash return or less.

What This Metric Really Tells You About Your Real Estate Investment

The cash-on-cash return can help you estimate future cash distributions. It’s a good way to estimate a percentage of profits relative to how much cash you put into the investment.

However, cash-on-cash return calculations do not give you a complete picture of an investment’s value. In rapidly appreciating markets, a large part of an investment’s appeal may be the potential to sell later for substantially more than you paid today. Expected appreciation typically is not included in cash-on-cash calculations, at least not until you sell and realize that appreciation.

Also, it’s important to remember that the cash-on-cash return is pretax. Your net return will be lower than the cash-on-cash return in any given year if you have to pay taxes on your returns.

How Important is Cash-On-Cash Return?

Cash-on-cash return is very important for investors because it makes it easier to determine which property to purchase and the best way to finance that property. It’s a quick way to compare between similar investment opportunities.

The cash-on-cash return can also give you a snapshot overview of how your existing investments are doing. Your return using this metric will increase if you begin receiving more income from the property (e.g. if you successfully raise rents on rental units in the property) or sell it for a higher value than you paid for it. Similarly, your return will decrease if you have increased expenses or vacancies.

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Jeff Anderson

In his role as Director – Capital Projects for CEP Multifamily, Jeff is responsible for the planning, management, and execution of all capital improvement and deferred maintenance projects, in addition to closely collaborating with the Property Operations team on asset preservation and best practices. Jeff joined CEP Multifamily in 2022 as part of our pursuit to expand our operational capabilities and to bring project management and asset preservation under our in-house suite of services to better serve our growing portfolio.

Prior to joining CEP, he spent over 14 years with Kennedy Wilson, a global real estate investment company, working in various Project Management roles for their Commercial Investment, Property Services and Multifamily divisions. Most recently he served as the Multifamily Group’s Construction Manager for their 20,000+ unit portfolio in the Western United States.

Jeff attended Washington State University where he graduated Magna Cum Lade earning his BA in Business with an emphasis in Real Estate and a minor in Finance.

When he is not working, Jeff can be found relaxing on Whidbey Island, working on house projects, skiing or enjoying the various water activities the PNW has to offer.

Mark Whitcomb

As Director – Property Operations for CEP Multifamily, Mark leads the day-to-day operations of CEP Residential’s expanding multifamily portfolio. Mark is committed to executing core processes and fostering the growth of his CEP Residential teammates in the pursuit of asset and property management alpha.

Mark began managing his first property in 2001, two years after beginning his career in property management as part of an on-site team. Over the course of the next 20+ years, he worked in multiple capacities and markets throughout Washington, Oregon, Montana, and Virginia with portfolios totaling over 2,500 apartment homes and 49 communities.

Mark has always been passionate about developing both people and leadership skills through local and national multifamily housing associations. He was recognized as Property Manager of the Year in 2016 by Washington Multi Family Housing Association (WMFHA) and went on to obtain his NAA CAM and CAPS credentials by 2017. He spent two years as a Chairman on the Career Development Committee through WMFHA before being nominated and awarded membership to the NAAEI faculty in 2018. This allows Mark the opportunity to mentor emerging industry professionals seeking their own designations.

Mark has been married to his wife, Shea, since 2019. Together, they enjoy travel, cheering for their Seattle sports teams, and exploring the outdoors of the Pacific Northwest with their two dogs.

Jessica Disman

Jessica Disman joined CEP Multifamily in January of 2022 as Director of Capital Markets and Investor Relations and is responsible for new investor acquisitions.

She brings over 25 years of experience in sales and marketing in the investment and real estate industry. Most recently she spent 8 years at Broadmark Realty Capital Inc. and Broadmark Capital LLC, raising capital for a series of private lending REITs that ultimately led to the IPO of the company.

Jessica attended Bryn Mawr College where she earned a BA with a double major in English and Fine Art.

An artist at heart, Jessica enjoys drawing and painting and has paintings in collectors’ homes nationwide.

Karin Christianson-Hart

Karin Christianson-Hart serves as VP Finance & Administration for CEP Multifamily. As a member of the CEP Team, Karin oversees all finance, HR, risk management and administrative support for both CEP Multifamily and CEP Residential, the in-house property management division.

Karin has many years of property management experience from small startup firms to a large regional company. Problem solving, tactical management of multiple teams and a working knowledge of day-to-day business operations are strengths that Karin brings to the table. Other areas of expertise include captive insurance management and family office accounting for principal partners.

Karin earned bachelor’s degrees in Accounting and Business Administration from Central Washington University.

With a heart for missions Karin has most recently served on the Board of Hands for Peacemaking, a nonprofit that provides high efficiency wood burning stoves and clean water systems to the Mayan population in the highlands of Guatemala. Financial management support has also been provided to the Snohomish County Economic Alliance in its infancy along with a nonprofit football academy.

Outside of work Karin enjoys riding motorcycles, camping, and travelling with her husband.

Shawn Hoban

For over three decades, Shawn has been responsible for establishing and growing each of the operating businesses in The Coast Group of Companies and Hoban Family Office. It all started in 1987 when he co-founded Coast Property Management alongside his brother Tom after identifying the need for a high performing, values-based property management company. Coast has long since grown into The Coast Group which is a vertically integrated, privately owned family of real estate companies. Coast is one of the region's largest and most respected real estate services firms of its kind with offerings in property management, facility services, specialized construction, advisory, and investment services.

Shawn is an integrator and strategist for the Hoban's various ventures with a particular gift of taking complicated situations and making them executable. A leader with strong character, Shawn also
possesses a competitive streak that has shaped the success of their ventures together.

The Hoban Family Office, the holding company for the operating businesses, brings innovative ideas to the commercial real estate industry through Coast Innovation Center while serving the charitable causes of the Hoban family and the Coast Group. He is passionate about identifying and developing talent to
support their businesses, while mentoring the next generation of leaders inside and outside of his family.

His service and awards include Top 40 Under 40 Business Executive by the Puget Sound Business Journal, Director for The University of Notre Dame Alumni Association, Archbishop Thomas J. Murphy High School Board of Trustees Chair and Board of Regents, Fulcrum Foundation Board of Trustees, Vistage, Entrepreneur’s Organization (EO), and many other community organization throughout the Pacific Northwest and U.S. The brother’s ventures together earned them two very prestigious awards: The Washington State Family Enterprise Institute’s Family Business of the Year and The University of Notre Dame Alumni Association of Seattle co-alumni of the year.

Shawn holds a Bachelor’s degree in Business Finance from the University of Notre Dame and is both a Certified Commercial Investment Member (CCIM) and a Certified Property Manager (CPM) with the Institute of Real Estate Management (IREM).

Shawn and his wife, Kathie, enjoy travel and outdoor recreation on the Puget Sound while following the active lives of their four adult daughters and a growing generation of grandchildren.

Tom Hoban

Tom has over thirty years of experience as a property manager, real estate advisor, and investor. In 1987, he co-founded Coast Property Management alongside his brother Shawn after identifying the need for a high performing, values-based property management company in the market. Coast has long since grown into The Coast Group, which is a vertically integrated, privately owned family of real estate companies encompassing property management, facility services, specialized construction, advisory, and investment companies. Today, The Coast Group is one of the region’s largest and most respected
real estate services firms of its kind as it is able to leverage the different companies' resources to provide the best possible returns for clients.

Built as an extension of their humble servant leader view of themselves, the Hoban brothers and their executive leadership teams have become synonymous with excellence, innovation, and reliability. Along the way, the brothers have been recognized for their professional accomplishments and work in the communities they serve, earning them the co-alumni of the year award from the University of Notre Dame alumni association and The Family Enterprise Institute’s Washington Family Business of the Year.

Over the years, they invited others who possessed complimentary if not superior talents to join them as partners and co-leaders in the Coast Group of Companies. In 2017, they formed The Hoban Family Office (HFO) to create a platform for innovation (Coast Innovation Center), talent development, and leadership in service to the Coast Group of Companies, their families and the communities they serve. It also serves as their charitable arm, with a focus on service to the poor and vulnerable and development of tomorrow’s leaders.

Tom leverages his vast network, engaging personality and refreshingly transparent approach into many venues, including his long-running column in the Herald Business Journal, as a freelance writer and as a guest speaker or lecturer all while serving on several boards or advisory functions, including Santa Clara University Real Estate School Advisory Board, Washington State University – Everett, University of Portland board of trustee’s, The Washington State Governor’s Affordable Housing Advisory Board, The
Commercial Broker’s Association of Puget Sound, Archbishop Murphy High School (Everett, WA), The Boys and Girls Clubs, chairman for the Snohomish County Airport Commission, The City of Everett
Economic Development Advisory Council, and others. The brother’s ventures together earned them two very prestigious awards: The Washington State Family Enterprise Institute’s Family Business of the Year
and The University of Notre Dame Alumni Association co-alumni of the year.

Tom graduated from The University of Notre Dame with a BA in Finance. A former coach, scoutmaster, and basketball referee, in his spare time today Tom continues plays recreational basketball, remains active in his church and enjoys time with his wife, two sons, and daughter on the Puget Sound.

Josh Jansen

Josh Jansen has over 20 years of multifamily investment experience, both as a broker and principal. As CEO, President, & Managing Partner of CEP Multifamily (CEP), Josh leads the firm’s strategic growth and acquisition, disposition, and asset management functions. Since joining CEP as a principal in 2012, Josh has played an integral role in growing the firm’s acquisition and capital-raising volumes tenfold. Prior to joining CEP, Josh was a top national multifamily broker at Sperry Van Ness for multiple years.

Josh is active in his community and spent 9 years as a volunteer varsity football coach at a local high school. Josh also coached two years of youth football and served as a founding board member of the Private Enterprise Coalition of Snohomish County.

Josh earned a BA in Politics from Occidental College in Los Angeles and All-American honors as captain of the football team. Josh, his wife, Cheryl, and their two children enjoy travelling, hiking, and snow and watersports.

Mike Harmon

In 2004, Mike joined the Coast Group of Companies as CFO and Managing Partner of Coast Equity Partners. Mike’s role is to drive the growth of Coast Equity Partners through the acquisition of investment properties that produce outstanding returns for our clients.

Mike brings many years of business leadership, entrepreneurial drive, and real estate experience to the table. He has held critical roles in the strategic management of high growth companies and early-stage technology start-ups. From raising capital on Wall Street to buying his first rental property while still in college, Mike brings a unique broad range of talents to Coast Equity Partners.

Mike’s entrepreneurial spirit is grounded in a solid business background. He has designed and managed the development of several mission-critical business systems for fortune 500 companies, participated in

the creation of new businesses and nurtured new growth opportunities for existing businesses. Mike has created and grown departments, successfully identified, negotiated, and closed strategic partnerships, managed key client relationships and secured new capital investments for the companies he has helped lead.

Since 1992, Mike has been engaged in the identification, acquisition and rehabilitation of real estate with excellent investment potential. His portfolio of properties includes residential holdings as well as rental properties in various markets throughout the Pacific Northwest and United States.

Mike holds a BS in Finance from San Diego State University and an MBA with concentrations in Marketing and Management from the University of Notre Dame.

Mike enjoys travel, youth coaching, winter sports, water recreation, golf and fishing. He lives with his wife and four sons in North Seattle and is active in his church, children’s schools and local community.

What Cash-on-Cash Return Really Tells You About Your Real Estate Investment