Cash-on-Cash Return: A Guide for CRE Investors

Cash-on-Cash Return Formula

• Annual pre-tax cash flow is your property's net income after operating expenses and debt service (mortgage principal and interest) but before income taxes.
• Total cash invested includes your down payment, closing costs, and any initial renovation or tenant-fit expenses paid in cash.

Example

If you invest $250,000 in a property and it generates $25,000 in pre-tax cash flow during the first year, your cash-on-cash return is 10% (25,000 ÷ 250,000).

CoC return is a snapshot of current performance, not long-term appreciation. Pair it with NOI, cap rate, and the debt service coverage ratio (DSCR) to get a picture of both income and financing health. If you want to see how cash flow and timing affect performance over the entire hold period, many investors also look at internal rate of return (IRR).

Why Does Cash-on-Cash Return Matter for Canadian Investors?

It reveals how efficiently your investment generates real cash flow after financing.

Every investor wants their money to work harder, but in commercial real estate it's easy to focus on prices and projections instead of what truly matters: steady, spendable cash flow. Cash-on-cash return shows you exactly how efficiently the cash you put in generates that income.

Unlike net operating income (NOI) or cap rate, which focus on property performance before financing, cash-on-cash return reflects the impact of leverage. It tells you how your property's financing, rent levels, and expenses combine to create or limit your yearly cash yield.

For investors comparing multiple listings, this metric offers a fast way to see how one opportunity stacks up against another. It helps you focus on financial performance that supports long-term stability and scalable growth.

How Do You Calculate Cash-on-Cash Return?

Divide your property's annual pre-tax cash flow by your total cash invested.

Here's a step-by-step guide on how to calculate your cash-on-cash return:

1. Estimate Annual Rental Income

Start by identifying every potential income source your property generates. Include rent, parking, and any additional income from storage, signage, or service fees.

2. Subtract Operating Expenses

Next, determine your operating expenses to find NOI. Account for property taxes, insurance, repairs, maintenance, utilities, and management fees.

3. Subtract Annual Debt Service

From NOI, subtract your total annual mortgage payment, including both principal and interest, to calculate your pre-tax cash flow.

4. Add Up Your Total Cash Invested

Now add every dollar you've put into the property upfront. Combine your down payment, closing costs (typically 1.5-3% of the purchase price in most provinces), and any renovation or tenant-fit expenses paid in cash.

5. Divide to Find Your Cash-on-Cash Return

Finally, divide your annual pre-tax cash flow by your total cash invested, then multiply by 100 to express the result as a percentage.

Example

For example, say you're considering an Ontario industrial property for sale that costs $900,000.

You put $225,000 down and spend $15,000 in closing and fit-out costs. That puts your total cash invested at $240,000.

The property has an annual NOI of $60,000 and your annual debt service will be $42,000. That makes your pre-tax cash flow $18,000.

$18,000 ÷ $240,000 = 7.5% cash-on-cash return.

How Can Financing Change Your Cash-on-Cash Return?

Loan terms, amortisation, and interest rates can all raise or lower your cash yield.

Leverage can amplify returns or create cash flow pressure that keeps you awake at night. Understanding how financing affects CoC helps you find the right balance for your risk tolerance.

Here are the most common ways financing details can change your annual yield.

• Amortisation terms: Conventional commercial loans often cap at 25 years. CMHC-insured multi-unit mortgages can extend to 30 or even 40 years, lowering annual payments and improving cash flow.
• Interest rates: A 1% change in borrowing rate can move cash-on-cash return several points.
• Loan-to-value (LTV) ratios: CMHC financing may reach 85% LTV for qualifying properties, allowing smaller equity outlays and potentially higher CoC but also greater leverage risk.
• DSCR: Lenders typically require a minimum DSCR (usually 1.20-1.25), which limits how much you can borrow even if higher leverage would boost your CoC.

Both properties deliver 8% cash-on-cash returns despite different financing approaches. Property A (25% down) has higher annual debt service but requires less capital upfront. Property B (35% down) has lower debt service but requires $100,000 more in initial equity, demonstrating how leverage and equity can be balanced to achieve target returns.

What Factors Have the Biggest Impact on Cash-on-Cash Return?

Leverage, property type, and management efficiency all play key roles.

Several key variables influence how your cash-on-cash return performs over time. Understanding these factors can help you anticipate where your yield might rise or fall.

1. Leverage: Higher borrowing can increase CoC by reducing equity outlay, but too much debt can raise payments and shrink cash flow.
2. Interest Rate: Even a small rate shift changes annual debt service. Revisit CoC whenever rates reset.
3. Property Type: Asset class affects CoC through expense ratios. Industrial properties deliver higher returns (15-25% expenses) than multifamily (35-50%) due to lower maintenance and management costs.
4. Lease Structure: Net leases shift more expenses to tenants, which improves NOI and CoC.
5. Vacancy and Management: Longer vacancies or inefficient operations quickly erode returns.

Small business owners and new investors often focus solely on rent levels, but expense ratios or financing terms can move CoC several points. When comparing industrial properties for sale and apartment buildings for sale, understanding the expense ratio differences helps you set realistic return expectations for different asset classes. Always review both sides of the equation before deciding what a “good” return really means.

How Is Cash-on-Cash Return Different from Cap Rate and ROI?

Cap rate doesn't account for debt service, ROI measures cumulative returns, and CoC focuses on today's cash flow.

Here's how each metric compares:

What Counts as a Good Cash-on-Cash Return in Canada?

Most investors target 5-10%, depending on risk and property type.

There is no universal benchmark, but most Canadian investors consider 5-10% a reasonable starting range for stabilised commercial assets.

• Lower-risk assets such as grocery-anchored retail centres for sale may fall in the 4-6% range.
• Value-add or repositioning opportunities can reach 10% or higher to offset greater vacancy or capital risk.

Your “good” CoC depends on your financing costs, equity size, and management style. A 7% return may sound modest, but steady cash flow from a stable property often outperforms a 12% return tied to tenant turnover and vacancy risk. Compare properties using the same assumptions to keep results consistent.

How Can You Improve Your Cash-on-Cash Return?

Focus on increasing income, cutting costs, and optimising financing terms.

Each of these actions can raise your CoC incrementally without taking unnecessary risk, giving you more control over performance in any market cycle.

• Increase revenue: Review rents regularly and consider upgrades that justify higher rates.
• Reduce costs: Streamline operations, re-bid service contracts, and monitor energy usage.
• Optimise financing: Compare lenders and consider refinancing when rates or amortisation terms improve.
• Stabilise tenancy: Reliable tenants reduce downtime and help maintain consistent income.

What Are Common Pitfalls When Using Cash-on-Cash Return?

Ignoring financing limits, taxes, or changing expenses can distort your results.

Even experienced investors sometimes misread cash-on-cash return because the metric captures only one part of performance. Keeping these limitations in mind helps you interpret results accurately.

Common pitfalls include overemphasising yield without context, overlooking variable-rate loan risks, and ignoring taxes or capital reserves (funds for major repairs). Chasing high CoC without checking DSCR can lead to cash flow problems that threaten your entire investment. Treat cash-on-cash return as a guide, not a guarantee, and pair it with NOI, DSCR, and long-term value analysis for a fuller view.

What Should Canadian Investors Take Away?

Cash-on-cash return keeps your analysis grounded in real, spendable cash flow.

Explore current commercial listings in Canada to see how property performance and income potential vary by region and sector.