CRE 101 · deweyluong.realtor

Cash-on-Cash Return Explained: What Your Actual Cash Earns in a Georgia Commercial Deal

Cap rate tells you what the building earns. Cash-on-cash tells you what your money earns — and the two numbers are rarely the same. By Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 318 closed sales / $281.2M career volume · 678-707-2498

Most Georgia commercial deals are bought with a loan, which means most investors never earn the cap rate — they earn whatever is left after the lender is paid, measured against the cash they actually wired in. That leftover yield is the cash-on-cash return. It is the fastest honest screen for an income deal, and also the easiest metric to inflate with two quiet input tricks. This page gives the formula, a worked example with every input shown, and the checks that keep the number real. It pairs with cap rate and NOI and DSCR — the three numbers belong on the same page of any analysis.

The formula

• Cash-on-cash return = annual pre-tax cash flow ÷ total cash invested.
• Annual pre-tax cash flow = NOI − annual debt service. Debt service means the full mortgage payment, principal and interest together — the cash that actually leaves your account. Subtracting interest only is a classic inflation trick.
• Total cash invested = down payment + closing costs + cash loan fees + immediate capital (repairs, leasing commissions and tenant work you already know the property needs). If cash must leave your account for the deal to work, it belongs in the denominator.
• Pre-tax, single-year, cash only: the metric ignores taxes, principal paydown, appreciation and sale proceeds by design. That is its limit, not a flaw — as long as you do not ask it to do IRR's job.

Worked example. The numbers below are made up and rounded to teach the mechanics. This is not a real property.

• A made-up Gwinnett retail property is priced at $2,000,000 with in-place NOI of $140,000 — a 7.0% cap rate on income tenants are actually paying today.
• The buyer borrows $1,400,000 (70% of price). The full annual debt service on that loan is stated as $100,000, rounded. Annual pre-tax cash flow is therefore $140,000 − $100,000 = $40,000.
• Total cash invested: $600,000 down payment + $50,000 of closing costs and immediate work = $650,000.
• Cash-on-cash return: $40,000 ÷ $650,000 ≈ 6.2%. Note what happened: the property earns 7.0% unlevered, but this buyer's cash earns about 6.2% in year one, because the cost of the debt runs ahead of the property's yield on these terms. That gap is negative leverage, and this metric is how you see it before you close.
• Sensitivity: if a tenant paying $20,000 of that NOI leaves and the space sits for a year, cash flow falls to $20,000 and the return halves to about 3.1% — while the mortgage payment does not move. If rents instead grow and cash flow reaches $52,000, the return rises to 8.0% on the same cash in. The denominator never changes; the numerator carries all the risk.

Cash-on-cash next to the other three numbers

• Cap rate (NOI ÷ price): the property's unlevered yield. Use it to compare buildings, not loans.
• Cash-on-cash (cash flow after debt ÷ your cash in): your year-one cash yield with a specific loan. Use it to compare financing structures on the same building.
• DSCR (NOI ÷ debt service): the lender's safety margin. In the worked example it is $140,000 ÷ $100,000 = 1.40x. A deal can show a thin cash-on-cash return and a comfortable DSCR, or the reverse — they measure different things.
• IRR: the multi-year total return including rent growth, principal paydown and the eventual sale. Cash-on-cash is year one only; IRR is the whole hold. Serious underwriting shows both.

The four ways this number gets inflated

• Pro forma NOI: vacant space filled at asking rent in the model. Use in-place income, and price lease-up as future work. (The same trap that inflates a valuation.)
• A down-payment-only denominator: closing costs and known immediate capital quietly left out.
• Interest-only math: subtracting interest but not principal, or quoting the return only during a short interest-only period without saying so.
• No reserves: no vacancy allowance, no management cost, no roof or parking-lot reserve. Cash flow that assumes a perfect year is a projection, not a yield.

Cho nhà đầu tư người Việt

Nhiều nhà đầu tư người Việt tại Metro Atlanta và Gwinnett nhìn vào cap rate rồi nghĩ đó là mức lợi nhuận mình sẽ nhận được. Thực tế, khi vay ngân hàng, khoản bạn nhận là phần còn lại sau khi trả nợ vay, tính trên tổng tiền mặt bạn thực sự bỏ vào — đó là cash-on-cash return. Công thức đơn giản: dòng tiền trước thuế hàng năm chia cho tổng tiền mặt đầu tư (down payment cộng chi phí đóng hồ sơ và sửa chữa cần thiết ngay). Hai điểm phải kiểm tra trong mọi bảng phân tích: NOI có phải thu nhập đang có thật hay chỉ là dự phóng khi lấp đầy mặt bằng trống, và mẫu số có gồm toàn bộ tiền mặt bạn phải chi hay chỉ tính riêng down payment. Chỉ cần một trong hai điểm này bị làm nhẹ đi, con số lợi nhuận sẽ đẹp hơn thực tế rất nhiều.

Cash-on-cash chỉ đo dòng tiền của một năm, trước thuế; nó không tính phần gốc vay được trả dần, tăng giá tài sản hay lợi nhuận khi bán. Vì vậy hãy đọc nó cùng với cap rate, DSCR và phân tích nhiều năm trước khi quyết định. Đây là thông tin giáo dục chung, không phải tư vấn đầu tư, pháp lý hay thuế.

Frequently asked questions

What is cash-on-cash return, in plain English?

Cash-on-cash return is the annual pre-tax cash a property puts in your pocket, divided by the total cash you actually put into the deal. If a property returns $40,000 of cash in a year after all expenses and the full mortgage payment, and you put in $650,000 of your own cash (down payment plus closing costs and immediate repairs), the cash-on-cash return is about 6.2%. It answers one narrow question: what is my own cash earning this year? It is not the property's total return.

How is cash-on-cash return different from cap rate?

Cap rate ignores financing entirely: it is NOI divided by price, so it describes the property. Cash-on-cash includes the loan: it subtracts the full annual debt service (principal and interest) from NOI and divides by your cash in, so it describes your equity position in that property with that loan. The same building at the same price can show a 7% cap rate and a 6.2%, 8% or 3% cash-on-cash return depending on the loan terms and how much cash you put down.

What counts as total cash invested?

Everything you must write a check for to own and stabilize the property: the down payment, closing costs (lender fees, title, legal, transfer and recording charges), loan fees paid in cash, and immediate capital you know is coming, such as a roof repair or leasing commissions and tenant improvements needed to keep a tenant. The most common way this metric is inflated is a denominator that counts only the down payment. Leave $100,000 of real cash out of the denominator and a mediocre deal can be made to look strong.

Does a higher cash-on-cash return always mean a better deal?

No. Cash-on-cash is a single-year, pre-tax cash yield. It says nothing about principal paydown (your loan balance falling, which is real equity growth), appreciation, tax effects, rent growth in later years, or the risk taken to get that yield. A high cash-on-cash figure built on a pro forma NOI, a short interest-only period, or deferred maintenance is fragile. Read it next to cap rate, DSCR and a multi-year view such as IRR before deciding, and stress-test it with a vacancy and a rate or expense surprise.

Tỷ suất hoàn vốn trên tiền mặt (cash-on-cash) được tính như thế nào?

Công thức: lấy dòng tiền trước thuế hàng năm của tài sản (NOI trừ đi toàn bộ khoản trả nợ vay hàng năm, gồm cả gốc và lãi) chia cho tổng tiền mặt thực tế bạn bỏ vào thương vụ (tiền đặt cọc trả trước/down payment, chi phí đóng hồ sơ, phí vay và chi phí sửa chữa cần thiết ngay từ đầu). Ví dụ: dòng tiền $40,000 chia cho $650,000 tiền mặt bỏ vào bằng khoảng 6,2%. Điểm cần kiểm tra: NOI phải là thu nhập đang có thật, không phải con số dự phóng, và mẫu số phải gồm toàn bộ tiền mặt bạn thực sự chi, không chỉ riêng down payment. Đây là thông tin giáo dục chung, không phải tư vấn đầu tư, pháp lý hay thuế.

This page is general education, not investment, legal, tax or financial advice, and not a projection or guarantee of any property's return. Every figure in the worked example is made up and rounded to teach the mechanics. Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 678-707-2498 · dewey.luong@serhant.com