Short answer
Cash-on-cash return is a property's annual pre-tax cash flow after debt service divided by the total cash equity invested. In a hypothetical deal where an investor puts in $800,000 and receives $58,000 in a year, the cash-on-cash return is 7.25%. It measures the current cash yield on the money actually at risk, one year at a time, and ignores loan principal paydown, appreciation, taxes and the eventual sale.
Key Takeaways
- Cash-on-cash return divides one year's pre-tax cash flow after debt service by total cash invested, including closing costs, so it describes current yield rather than total return.
- Debt raises cash-on-cash return only when the cap rate exceeds the loan constant, which includes principal; a loan priced below the cap rate can still lower it once amortization starts.
- A levered cash-on-cash return should not be compared directly with an unlevered cap rate, because the higher number reflects borrowed money and its risks, not a better property.
- The metric ignores principal paydown, appreciation, depreciation and other tax effects, and when the sale happens, so it belongs next to IRR and equity multiple, never in place of them.
- A year-one figure can move materially in later years as rent increases arrive, interest-only periods end and loan rates reset, so the full year-by-year schedule matters more than the headline.
Formula
Cash-on-cash return = Annual pre-tax cash flow after debt service / Total cash equity invested
Cash equity includes the down payment plus closing costs, loan fees and any reserves funded with investor money.
What cash-on-cash return measures
Cash-on-cash return answers one narrow question: of the cash an investor actually put into a property, what percentage came back as spendable cash this year? It is a single-year, pre-tax, cash-basis measure of yield on equity. It says nothing about whether the property gained or lost value.
The numerator is net operating income minus annual debt service (interest and any principal payments) minus any capital reserves the owner funds from operations. The denominator is total cash equity: the down payment plus closing costs, lender fees and upfront reserves. Using the loan amount or the purchase price as the denominator produces a different, and misleading, number.
In a fund or syndication the same idea usually appears as a distribution yield: annual distributions divided by contributed capital. The two can diverge. A sponsor may hold back cash for reserves, or, less favorably, pay distributions from reserves or new capital rather than from property income, which makes the yield look higher than the property is earning.
Why it matters to a net lease investor
Single-tenant net lease investors buy mainly for income, and the lease fixes the rent for years at a time, so cash-on-cash return is usually the first figure they check. Because the rent is contractual, the metric is more predictable here than in multifamily or office, but only as predictable as the debt terms beneath it.
Borrowing costs are the swing factor. The 10-year Treasury yield was 5.18% on September 24, 2026 (Federal Reserve H.15), while The Boulder Group reported an average single-tenant net lease cap rate of 6.82% for the second quarter of 2026. With that narrow spread, fixed-rate debt priced off Treasuries adds far less to cash-on-cash return than it did when rates were lower, and in some cases it subtracts. The mechanism is covered in positive leverage and in what a 10-year Treasury near 5% means for commercial real estate.
Worked example: all cash vs 60% loan-to-value
The table below compares one hypothetical property bought three ways: all cash, with a 60% loan-to-value interest-only loan at a hypothetical 6.00% rate, and with the same loan at the same hypothetical 6.00% rate on a 25-year amortization. Closing costs are left out of this hypothetical to keep the arithmetic visible.
| Line | All cash | 60% LTV, 6.00% interest-only | 60% LTV, 6.00%, 25-year amortization |
|---|---|---|---|
| Purchase price | $2,000,000 | $2,000,000 | $2,000,000 |
| Loan amount | $0 | $1,200,000 | $1,200,000 |
| Cash equity | $2,000,000 | $800,000 | $800,000 |
| Net operating income | $130,000 | $130,000 | $130,000 |
| Annual debt service | $0 | $72,000 | $92,779 |
| Loan constant (debt service / loan) | n/a | 6.00% | 7.73% |
| Cash flow after debt service | $130,000 | $58,000 | $37,221 |
| Cash-on-cash return | 6.50% | 7.25% | 4.65% |
| Year-one principal paydown (not in cash-on-cash) | $0 | $0 | $21,360 |
All cash, cash-on-cash return equals the hypothetical 6.50% cap rate, because there is no debt service. With the interest-only loan, the hypothetical loan constant of 6.00% sits below the 6.50% cap rate, so each borrowed dollar costs less than it earns and the hypothetical cash-on-cash return rises to 7.25% ($58,000 / $800,000).
The third column is the one that surprises people. The interest rate is the same hypothetical 6.00%, but amortization raises the loan constant to 7.73%, above the cap rate, so the hypothetical cash-on-cash return falls to 4.65%, below the all-cash figure. The $21,360 of hypothetical first-year principal paydown is real equity being built, and adding it back gives a hypothetical 7.32% ($58,581 / $800,000), but that money is not in the investor's hands until a sale or refinance.
Why year-one cash-on-cash can differ from later years
An offering that quotes a single cash-on-cash figure is usually quoting year one. Three scheduled events can move it later: rent increases in the lease, the end of an interest-only period, and a loan rate reset or refinance at maturity. The first raises the numerator; the other two raise debt service.
| Period and loan status | NOI | Debt service | Cash flow | Cash-on-cash |
|---|---|---|---|---|
| Years 1 to 5, interest-only at 6.00% | $130,000 | $72,000 | $58,000 | 7.25% |
| Year 6, still interest-only at 6.00% | $143,000 | $72,000 | $71,000 | 8.88% |
| Year 6, amortization begins at 6.00% (25 years) | $143,000 | $92,779 | $50,221 | 6.28% |
| Year 6, loan resets to 7.50% (25 years) | $143,000 | $106,415 | $36,585 | 4.57% |
In this hypothetical, the same year-6 rent increase can lift cash-on-cash return to 8.88% or leave it at 4.57%, depending entirely on the loan. The tenant pays more rent in every row; only the debt changes. That is why the rent escalation schedule and the loan term sheet have to be read together.
How cash-on-cash return relates to cap rate, IRR and equity multiple
Each return metric answers a different question. The cap rate is an unlevered, property-level yield on price. Cash-on-cash return is a levered, equity-level yield for one year. IRR covers the whole hold, including the sale, and weights cash by when it arrives. The equity multiple is total cash back divided by cash in, with no time adjustment.
The most common error is setting a levered cash-on-cash return beside an unlevered cap rate and calling the higher number the better deal. In the hypothetical example above, the 7.25% interest-only return is not a better property than the 6.50% all-cash one; it is the same property with $1,200,000 of borrowed money, a loan maturity and refinance risk attached. Compare levered figures with levered figures, and compare the cap rate with the loan constant to see whether debt is helping at all.
Limits and common mistakes
Cash-on-cash return leaves out most of what determines a total return. It ignores principal paydown, changes in property value, the tax effects of depreciation, and the timing and price of the eventual sale. It is a useful snapshot and a poor scorecard.
- Leaving closing costs out of equity. Adding a hypothetical $40,000 of closing costs to the interest-only example raises equity to $840,000 and lowers the hypothetical return from 7.25% to 6.90%.
- Using scheduled rent instead of collected rent. The numerator should reflect cash actually received after any landlord expenses the lease leaves with the owner.
- Skipping reserves. A double-net lease that leaves roof and structure with the landlord needs a reserve; see absolute NNN vs triple-net.
- Treating every distribution as income. Distributions funded from reserves or returned capital are not property cash flow.
- Comparing across different loan structures. An interest-only year and an amortizing year are not the same yield.
Because cash-on-cash return is pre-tax, it also says nothing about how distributions are taxed; depreciation often shelters part of the cash in early years, and recapture can apply at sale. Consult your own tax advisor about how these rules apply to your situation.
Frequently Asked Questions
Q: What is a good cash-on-cash return for net lease real estate?
A: There is no universal number. It depends on tenant credit, remaining lease term, how much debt is used and at what loan constant, and prevailing interest rates. A useful check is to compare it with the cap rate and the loan constant: a cash-on-cash return far above the cap rate usually reflects more debt or weaker credit, not a better property.
Q: Does cash-on-cash return include principal paydown?
A: No. Principal payments are part of debt service, so they reduce the numerator, but the equity they build is not counted. That is why amortizing loans show a lower cash-on-cash return than interest-only loans at the same rate, even though the owner is building equity faster.
Q: Is cash-on-cash return the same as the cap rate?
A: Only for an all-cash purchase with no closing costs or reserves. Once debt is added, cash-on-cash return measures yield on equity after loan payments, while the cap rate stays a yield on the full property price before any financing.
Q: Is cash-on-cash return calculated before or after taxes?
A: Before taxes. It uses cash flow before income taxes, so it does not reflect depreciation deductions, passive loss limits or recapture at sale. Consult your own tax advisor about after-tax results.
Q: Can cash-on-cash return be negative?
A: Yes. If annual debt service and landlord costs exceed net operating income, cash flow is negative and the owner must fund the shortfall, which is a sign the debt is too large or too expensive for the income.
Q: How is cash-on-cash return different from a fund distribution yield?
A: A distribution yield divides cash actually paid to investors by contributed capital. It can be lower than property-level cash-on-cash return because of fees and reserves, or higher if distributions are funded from sources other than operations. Ask which one is being quoted.
Sources
- Federal Reserve, H.15 Selected Interest Rates (September 25, 2026 release)
- MBA NewsLink, Single-Tenant Net Lease Cap Rates Rise, Boulder Group Reports (July 2026)
- CFA Institute, Rates and Returns, Refresher Reading (2026)
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This page is for informational purposes only and is not an offer to sell or a solicitation of an offer to buy any security, nor investment, tax, or legal advice. Examples are hypothetical unless a source is cited. Consult your own advisors about your situation.
