Cash-on-Cash Return Answers a Different Question

Cash-on-cash return measures annual pre-tax cash flow against the cash you actually put into a property: annual pre-tax cash flow ÷ total cash invested. Annual cash flow is usually NOI less annual debt service. Invested cash commonly includes the down payment, closing costs, initial repairs, and required reserves.

Worked Cash-on-Cash Example

Assume $100,000 of NOI and $64,800 of annual debt service. Pre-tax cash flow is $35,200. If the down payment and closing costs total $325,000, the cash-on-cash return is 10.8%. If the property costs $1,250,000, its cap rate remains 8.0%: financing changed the equity result, not the asset's NOI yield.

Financing Changes the Result

Leverage can increase cash-on-cash return when borrowed capital costs less than the unlevered yield. It can also eliminate cash flow when rates, amortization, reserves, or a balloon payment work against the property. A smaller down payment is not automatically a better investment.

Worth knowing: principal paydown builds equity, but it is not current cash flow. State whether each figure is actual, underwritten, or stabilized.

Test financing scenarios in Snap & Map and compare the asset's unlevered yield in the cap rate guide.