| Asset Class | Yr 1 CoC Target |
|---|---|
| Core NNN Retail | 4–7% |
| Class A Industrial | 5–8% |
| Hotel (Select-Service) | 6–10% |
| Value-Add Industrial | 3–6% → 8–12% |
| Multifamily Core-Plus | 4–7% |
/ Total Equity
Pre-Tax CF = NOI
− Annual Debt Service
Equity = Down Payment
+ Closing Costs
+ CapEx at Closing
Cash-on-Cash Return Analysis
| Year | Gross Rent | OpEx + CapEx | NOI | Debt Service | Pre-Tax CF | CoC | DSCR | Loan Balance |
|---|
IRR across hold periods and exit cap rates, all other inputs held constant.
Cash-on-Cash Return: The Complete Guide
Cash-on-cash return (CoC) is the simplest and most intuitive measure of annual cash yield from a leveraged real estate investment. The formula is straightforward: divide your annual pre-tax cash flow (NOI minus annual debt service) by your total equity invested (down payment plus closing costs and upfront CapEx). The result tells you what percentage of your invested equity you're getting back as cash each year.
Unlike IRR, cash-on-cash doesn't account for the time value of money, equity paydown, or appreciation. Unlike cap rate, it accounts for the impact of debt financing. This makes CoC the ideal metric for answering the question: "How much cash will I actually receive this year relative to what I put in?"
Positive vs. Negative Leverage in CRE
Leverage is "positive" when the blended cost of debt is below the property's cap rate, meaning financing amplifies equity returns above the unlevered yield. Leverage is "negative" when borrowing costs exceed the cap rate, meaning every dollar of debt dilutes equity returns below the unlevered cap rate.
In 2022–2023, many US commercial real estate markets shifted to negative leverage as the Fed's rate hikes pushed borrowing costs above going-in cap rates. Assets that looked attractive at 5.5% cap rates with 3.5% debt suddenly faced 7%+ borrowing costs, making the levered CoC lower than the unlevered cap rate. This dynamic drove significant price corrections in office and multifamily sectors while NNN assets with long-term debt in place remained more insulated.
Cash-on-Cash vs. IRR: When to Use Each
Both cash-on-cash and IRR are essential metrics, but they measure different things. Cash-on-cash measures current yield — how much cash you're receiving today relative to your equity. IRR measures the total compounded return over the hold period, including income, appreciation, loan paydown, and the time value of each cash flow.
Use cash-on-cash when evaluating income adequacy — can this property fund distributions to investors? Use IRR when comparing investment alternatives with different risk profiles, hold periods, or capital structures. A high CoC with low IRR often means the property has strong current income but limited growth or appreciation. A low CoC with high IRR indicates most return comes from backend appreciation rather than current income.
How Leverage Affects Cash-on-Cash Returns
The most powerful driver of cash-on-cash return is leverage — the amount of debt financing you use relative to equity. More debt (higher LTV) amplifies CoC returns when leverage is positive, and amplifies losses when negative. This is why institutional investors are highly attuned to the spread between cap rates and debt costs (often called the "cap rate / debt constant spread").
Example: A property with a 6.5% cap rate financed at 65% LTV with a 5.8% debt constant generates approximately 8.0% Year 1 CoC — significantly above the 6.5% unlevered cap rate. The same property financed at 65% LTV with a 7.0% debt constant generates approximately 5.5% Year 1 CoC — below the unlevered cap rate. This is why borrowing conditions dramatically affect CRE investment economics.
How to Interpret Your Cash-on-Cash Results
A Year 1 cash-on-cash return of 8% or higher is strong for most commercial real estate — it typically reflects either a well-priced deal, positive leverage, or an asset with above-market income relative to its cost. Returns in the 5–8% range are solid and typical for stabilized, investment-grade NNN or industrial assets financed at reasonable leverage.
A CoC between 3% and 5% is modest — often seen on core, low-risk assets in negative-leverage conditions, where investors are trading current yield for stability and appreciation potential. A CoC below 3%, or negative, isn't automatically a bad deal, but it means the return case rests almost entirely on rent growth, lease-up, or exit appreciation rather than current income — check the IRR and equity multiple before drawing conclusions from CoC alone.
- 8%+: strong current yield, often positive-leverage or value-add
- 5–8%: solid, typical for stabilized core-plus NNN or industrial
- 3–5%: modest, common in negative-leverage or core conditions
- Below 3% or negative: return depends on appreciation, not income — verify with IRR
Worked Example: Financing a Net-Lease Retail Acquisition
An investor buys a single-tenant NNN retail property for $4.5M, generating $315,000 in Year 1 NOI — a 7.0% going-in cap rate. The deal is financed at 70% LTV, giving a $3.15M loan at 6.5% interest on a 25-year amortization schedule (a debt constant of roughly 8.1%), leaving about $1.4M in required equity after closing costs.
Annual debt service comes to roughly $3.15M × 8.1% ≈ $255,000, leaving Year 1 cash flow of $315,000 − $255,000 = $60,000. Dividing that by the $1.4M invested gives a Year 1 cash-on-cash return of roughly 4.3%.
Against the benchmark ranges above, that lands in the "modest" tier — unsurprising, since the 6.5% cost of debt sits close to the 7.0% cap rate, leaving little positive-leverage spread. An investor evaluating this deal on cash-on-cash alone might pass, but should also check the equity multiple and IRR: with contractual rent bumps and eventual loan paydown, the total return over a full hold period may still be attractive even though current-year cash yield is thin. (Figures are rounded for illustration; enter the exact inputs into the calculator above for a precise result.)