The short answer
Cash-on-cash return is one year's pre-tax cash flow from a property, after debt service, divided by the cash equity you put in. It is a single-year income ratio: it says nothing about appreciation, the sale, taxes or how long the money is tied up. A DST's distribution rate is the closest equivalent in an offering, but it is measured after the sponsor's fees and reserves.
At a glance
| Formula | Annual cash flow after debt service, divided by total cash invested |
|---|---|
| Starting point | Net operating income, less principal and interest |
| Leaves out | Appreciation, sale proceeds, income taxes and the timing of cash |
| Leverage test | Debt raises the ratio only when its cost is below the property's unlevered yield |
The ratio is an industry convention built on lender definitions, not a defined tax term.
No statute or regulation defines cash-on-cash return. Its pieces come from lending practice: the OCC's Comptroller's Handbook, Commercial Real Estate Lending defines net operating income as gross income less operating expenses, excluding interest, principal and income taxes, and measures debt service against it. Cash flow is what remains of NOI after the loan payment.
Divide that cash flow by everything you put in: the down payment, closing costs and any reserves you fund. With no debt, cash-on-cash equals NOI divided by price, which is the capitalization rate. With debt, the ratio moves away from the cap rate in either direction.
In an exchange the denominator is usually set for you. Cash you keep from the sale is taxable boot, so the equity going in is normally all of your net proceeds, and the debt on the replacement often has to replace the debt you paid off. The leverage that drives your cash-on-cash return is therefore partly an exchange decision; see replacing the mortgage or adding cash.
A worked example shows leverage helping at one rate and hurting at another.
Hypothetical: a $2,000,000 property earns $120,000 of NOI, a 6% cap rate. Bought for cash, cash-on-cash is 6%. With a $1,000,000 interest-only loan at 5.5%, debt service is $55,000, cash flow is $65,000 and cash-on-cash on $1,000,000 of equity is 6.5%.
Price the same loan at 7% and debt service is $70,000, cash flow falls to $50,000 and cash-on-cash drops to 5%. Debt costing more than the property yields lowers the ratio; this is negative leverage. Amortizing principal lowers cash flow further, even though principal paid builds your equity. Treat these as rounded examples and confirm your own numbers with your CPA.
It bites when a distribution rate is read as a return on the property.
A DST quotes distributions as a percentage of the equity raised, which works like cash-on-cash at the investor level. Those dollars arrive after the DST's debt service, asset management fees and reserve contributions, and the equity base includes offering costs, so the rate can differ from the property's cap rate in either direction. See DST yield versus an NNN cap rate and DST fees and loads.
A distribution is not necessarily income. For non-traded direct participation programs and REITs, FINRA's Regulatory Notice 15-02 requires account statements using the net investment method to warn when part of a distribution is a return of capital, because it can look like earnings. Cash-on-cash also cannot show the sale: two investments with the same ratio can end very differently, which is what internal rate of return and DST yield versus total return address.
Related questions
Is cash-on-cash return before or after tax?
Before tax, by convention. Depreciation can shelter some or all of the cash on your return, so the after-tax picture can be better than the pre-tax ratio suggests, and it reverses as recapture when you sell.
Does paying down the loan count in cash-on-cash?
No. Principal reduces the cash you receive, so it lowers the ratio, even though it increases your equity. That equity shows up later in the sale proceeds and in IRR.
Should I compare a leveraged property and a debt-free DST on cash-on-cash alone?
Not alone. The leveraged property carries refinancing and rate risk that the ratio does not show; see DST leverage and interest rate risk.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.