Encyclopedia
Cash-on-cash return
Annual pre-tax cash flow after debt payments divided by the cash the buyer put in.
For example: An investor compares two buildings by cash-on-cash return because one needs much more cash down than the other. (Illustration only, not a real deal.)
This is a general industry term with no single official definition. Your lease or contract wording controls.
Example only, not a real client. Say you buy a building with a large down payment and a mortgage. After paying expenses and the mortgage, the cash left over in a year, divided by the cash you put in, is your cash-on-cash return. It tells you how hard your own money is working.
What I’d tell a friend
Cash-on-cash return shows your yearly cash yield, but it leaves out appreciation, loan paydown and tax. Look at it alongside other measures.
Why it matters to you
It's what your own cash earns each year after the mortgage. A deal can look good on capitalisation rate (cap rate, annual income after running costs divided by price) but poor on cash-on-cash if the debt is expensive.
How to use it in your deal
Buyers should calculate it on realistic numbers: actual net operating income (NOI, the income left after running costs), a vacancy allowance, reserves for capital items, and real loan terms, then compare with what that cash could earn elsewhere. Run it at higher interest rates too. Owners can track it year to year as rents and loans change. Remember it ignores tax, value change and loan paydown, so use it with other measures like internal rate of return (IRR, a return that accounts for when money goes in and out).
Lenders don't use it, but it helps you decide if a deal is worth the effort. In Metro Vancouver, where cap rates have often sat near or below mortgage rates, cash-on-cash in the first years can be thin or even negative; that's a sign you're relying on rent growth or appreciation, so be honest with yourself about it.
Owner-users buying their own premises can run it too, treating the market rent they'd otherwise pay as income. Sellers sometimes advertise a cash-on-cash figure based on their own old loan; ignore it and run your own.
Mistakes I see
Leaving out closing costs and property transfer tax. Ignoring reserves. Using teaser loan rates. Comparing it with cap rates as if they measure the same thing. Trusting the seller's figure.
In BC and Vancouver
No statute defines it. Property transfer tax and other closing costs should be included.
Official sources: Property transfer tax (Government of BC) · Bank of Canada: key interest rates
What it is
Cash-on-cash return is annual pre-tax cash flow after debt payments, divided by the cash you invested, including down payment and closing costs.
It is a simple way to compare investments with different financing.
Its limits
It measures one year only and ignores changes in value and the mortgage principal you pay down, which also build your wealth. A low cash-on-cash return can still be a sound investment for those reasons.
Use it with measures that capture the full hold, such as internal rate of return, and talk with your accountant about the after-tax picture, since tax can change the result a lot.
Questions to ask before you sign
- How much cash am I investing?
- What's the cash flow after debt?
- What if rates rise?
- What reserves do I need?
Keep reading
Related terms: Leverage (negative), Cap rate, Internal rate of return (IRR)
Working through this right now? Questions are free. Book a 15-minute call or call or text 604 256 2002, and I’ll give you a straight answer.
Back to the A–Z index · common questions · tactics to watch for · the shorter glossary
General information for British Columbia only. It isn’t legal, tax, accounting or financial advice, laws and rates change, and reading it doesn’t make you my client. Any numbers or scenarios are hypothetical. Check the linked official source and talk to a lawyer, accountant or other qualified professional before you act or sign anything. See the terms and disclaimer.