Cash-on-Cash Return (CoC)
The annual pre-tax cash flow an investor receives from a property divided by the total cash they invested, expressed as a percentage.
Definition
Cash-on-cash return measures the cash income an investor actually collects against the cash they put into a deal, before taxes. Unlike cap rate, which values a property independent of financing, cash-on-cash return isolates the effect of leverage: two buyers of the same building can post different CoC figures depending on down payment size and loan terms. Small bay buyers who finance with 25-30% down and a conventional commercial loan typically target CoC in the 6-10% range in year one, with the figure improving as rents escalate and the loan amortizes. Leverage raises CoC when the going-in cap rate exceeds the loan's interest rate and lowers it when the reverse is true, so investors comparing an all-cash purchase to a financed one should run both scenarios rather than relying on cap rate alone.
Formula
Cash-on-Cash Return = Annual Pre-Tax Cash Flow / Total Cash InvestedExample
An investor buys a $1,200,000 small bay property with 25% down ($300,000) plus $20,000 in closing costs, for total cash invested of $320,000. The property generates $96,000 in NOI. Annual debt service is $65,000, leaving $31,000 in pre-tax cash flow. Cash-on-cash return = $31,000 / $320,000 = 9.7%.