Cash-on-cash return measures the annual cash income generated by an investment as a percentage of the cash equity invested. The formula is simple: annual cash distributions divided by total cash invested. It strips away unrealized appreciation, accounting adjustments, and leverage effects to answer one question: what is this investment paying me in actual cash right now?
The Calculation
The math is intentionally straightforward:
Cash-on-Cash Return = Annual Cash Distributions / Total Cash Invested
If a limited partner commits $1 million to a fund and receives $80,000 in distributions during a given year, the cash-on-cash return for that year is 8%. The metric ignores the net asset value of remaining holdings, any unrealized gains or losses, and the time value of money.
Where Cash-on-Cash Is Most Useful
Cash-on-cash return is most commonly associated with real estate investing, where ongoing rental income creates a natural cash yield. But it has clear applications across private markets:
Real estate funds. Core and core-plus strategies live and die by cash-on-cash yield. Stabilized properties generating consistent rental income should deliver predictable annual cash distributions. Investors in these strategies expect cash-on-cash returns in the 5-7% range, with value-add targeting 8-12%.
Infrastructure and private credit. These asset classes are often structured around contractual cash flows, making annual cash yield a central performance measure.
Private equity. While buyout and growth equity funds are primarily valued on total return (IRR and MOIC), cash-on-cash becomes relevant when portfolio companies pay dividends or when GPs execute dividend recapitalizations. Some LPs, particularly those with distribution requirements like pension funds, specifically evaluate a GP’s ability to generate interim cash returns.
Cash-on-Cash vs. Other Metrics
Cash-on-cash return is a single-period, backward-looking metric. It does not replace the more comprehensive measures used in fund performance evaluation:
- Vs. IRR. IRR accounts for the timing of all cash flows and the terminal value. Cash-on-cash only looks at one year’s distributions. A fund with low cash-on-cash returns during its hold period but a large exit at the end could deliver a strong IRR.
- Vs. DPI. DPI measures cumulative distributions over the fund’s life. Cash-on-cash measures annual income. DPI is the lifetime view; cash-on-cash is the annual snapshot.
- Vs. MOIC. MOIC captures total return as a multiple including unrealized gains. Cash-on-cash ignores unrealized value entirely.
Limitations
Cash-on-cash return tells you nothing about capital preservation. An investment returning 12% cash-on-cash while the underlying asset depreciates by 20% is destroying value. It also ignores the impact of leverage: a highly levered property may generate an attractive cash-on-cash return on equity but carry significant risk.
For fund investors, cash-on-cash is best used as a supplementary metric alongside IRR, TVPI, and DPI. It is particularly valuable when evaluating funds designed to generate current income, such as private credit, core real estate, or infrastructure strategies, where the ability to produce consistent annual cash distributions is a core part of the investment thesis.
Frequently Asked Questions
How is cash-on-cash return calculated?
Divide the annual pre-tax cash flow received from the investment by the total cash equity invested. If you invest $500,000 and receive $50,000 in annual cash distributions, the cash-on-cash return is 10%. The calculation uses only actual cash received, not appreciation, depreciation, or other non-cash accounting items.
What is a good cash-on-cash return?
This depends heavily on asset class and risk profile. In real estate, stabilized core assets may target 5-7%, while value-add strategies aim for 8-12%. In private equity, cash-on-cash is less commonly used as a primary metric, but dividend recapitalizations and ongoing cash yields from portfolio companies can generate meaningful cash-on-cash returns during the hold period.
What is the difference between cash-on-cash return and IRR?
Cash-on-cash return measures annual cash yield as a simple percentage. It does not account for the timing of cash flows, capital appreciation, or the total hold period. IRR is a time-weighted measure that incorporates all cash flows and the terminal value. Cash-on-cash is a snapshot of current income; IRR is a comprehensive annualized return.
