Full Definition
Cash-on-cash return (CoC) measures the annual cash flow you earn on the equity you invested, after debt service. The formula: Annual Pre-Tax Cash Flow / Total Cash Invested. It reflects the real-world return an investor experiences, as opposed to cap rate which measures the unlevered return of the property itself.
Example
You invest $500K of equity in a $2M property. The property has $120K NOI minus $90K debt service = $30K cash flow. CoC = $30K / $500K = 6%.
Why It Matters
CoC tells you what you actually earn on your money. It accounts for leverage, which cap rate does not.
Related Terms
Cap Rate (Capitalization Rate)
The ratio of a property's Net Operating Income to its purchase price, expressed as a percentage. The primary metric for comparing commercial real estate investments.
IRR (Internal Rate of Return)
The annualized rate of return over an investment's hold period, accounting for timing of all cash flows including sale proceeds.
DSCR (Debt Service Coverage Ratio)
Ratio of NOI to annual debt service. Lenders require 1.20x-1.30x+ typical for commercial loans.