Cash-on-Cash Return

Cash-on-cash return answers a question cap rate does not: what return is the buyer earning on the actual cash they invested, given their financing? While cap rate treats a property as if bought in full with cash, cash-on-cash return divides annual pre-tax cash flow (after debt payments) by the total cash invested — the down payment, closing costs, and any improvement capital. Because it accounts for leverage, cash-on-cash return is usually higher than the cap rate when financing is favorable, since the buyer controls a large asset with a relatively small cash outlay. For an owner-occupant practice, the calculation is nuanced: the rent the practice pays itself funds the debt, and the principal portion builds equity, so the true return blends cash flow with wealth accumulation. Comparing the cash-on-cash return of buying against the alternative use of that capital is central to the ownership decision.

Cash-on-cash return reflects real-world results with financing in place, making it more practical than cap rate for judging whether the capital tied up in a building is working hard enough.

A practice invests $400,000 in cash (down payment plus costs) and the building generates $44,000 in annual pre-tax cash flow after debt service. The cash-on-cash return is 11% — the yield on the money actually invested.