Strategy, Legal & Operations

What is cash on cash return?

Learn what cash on cash return is, how to calculate it, and how it can help you make smarter property investment decisions.

If you’re a landlord (or an accountant with landlord clients), you’ll most likely already be familiar with terms like ROI, cap rate, and cash flow. But if the business deals with property investment, there’s another key metric you should understand—cash on cash return.

This simple yet powerful calculation is important to master, whether you’re dealing with real estate investments on behalf of clients or looking to invest as a business.

It helps you measure how efficiently your (or your clients’) money is working for you, particularly in rental property deals.

In this guide we’ll break down what cash on cash return is, how to calculate it, and how it can help you make smarter property investment decisions.

Here’s what we cover:

What is cash on cash return and how is it calculated?

Cash on cash return is a financial metric used to measure the annual return you earn on the actual cash you’ve invested into a property.

It’s a key performance metric for assessing how efficiently your capital is working—especially when the purchase is financed with a loan.

It’s particularly useful in real estate because it only focuses on the money you physically put into a deal and not the total property value or the full loan amount.

In simple terms, cash on cash return looks at your pre-tax cash income from a property relative to your total cash investment.

Think of it as a “real world” return. It tells you how much actual income you’re getting from the property right now, based on what you’ve spent.

That means it excludes things like equity growth from property appreciation or loan repayments. It’s all about actual pounds in your pocket from rental income.

Cash on cash return vs. return on investment (ROI)

While they might sound similar, cash on cash return and ROI are different in how they measure success:

• ROI looks at total return over the life of an investment, including appreciation, loan repayments, and resale profits.
• Cash on cash return focuses solely on annual cash income relative to the cash you’ve put in.

Think of cash on cash as a “real world” return. It tells you how much actual income you’re getting from the property right now, based on what you’ve spent.

How to calculate cash on cash return

The cash on cash return formula is simple:

(Annual pre-tax cash flow ÷ Total cash invested) x 100

Here’s a breakdown of each part:

Annual pre-tax cash flow

This is the net annual rental income before tax, minus operating costs and finance charges, which could include:

• Insurance.
• Maintenance.
• Service charges.
• Business rates (where paid by the landlord, such as during vacant periods or where contractually agreed).
• Property management fees.
• Loan interest (if applicable).
• Vacancy allowance.

Total cash invested

This is your upfront capital outlay—everything you paid to acquire and set up the investment, which could include:

• Deposit (e.g. 30–40% for commercial finance).
• Stamp Duty Land Tax (SDLT), or Land and Buildings Transaction Tax in Scotland/Land Transaction Tax in Wales.
• Legal and professional fees (surveys, solicitors, valuation).
• Refurbishment or fit-out costs.
• Broker or sourcing fees.
• VAT (if irrecoverable, or until reclaimed, noting that it can only reclaimed if the property/business is VAT-registered and opted to tax; otherwise, VAT paid becomes a permanent cost and should be clearly categorised as such).

Key considerations for UK commercial investors

Here are some important factors to consider and plan for when looking at your cash on cash return formula and calculation.

• Lease type matters: a Full Repairing and Insuring (FRI) lease reduces landlord costs and improves cash flow.
• VAT: if the property is opted to tax, VAT may apply on purchase and rent—factor this in.
• Void periods: commercial leases often have longer voids between tenants, so include realistic assumptions.
• Tax treatment: consider implications like capital allowances, allowable interest deductions, and VAT recovery when assessing net profit, though these are separate from cash on cash.

Example: Office space investment

Let’s say you or your client invested in an office space with the following details:

• Purchase price: £500,000 (commercial freehold)
• Loan (65% LTV): £325,000
• Deposit (35%): £175,000
• Stamp duty (commercial rate): £14,500
• Legal, valuation, broker fees: £6,000
• Fit-out and compliance works: £15,000
• VAT (irrecoverable portion): £2,500

The total cash invested:

(£175,000 + £14,500 + £6,000 + £15,000 + £2,500) = £213,000

For the purpose of this example, we’ll apply the following annual income and expenses:

• Annual rent under FRI: £42,000 (this is known as Triple Net Lease in countries such as the US)
• Vacancy allowance (1 month/year): £3,500
• Property management (2%): £840
• Loan interest (5% on £325,000): £16,250

Annual pre-tax cash flow:

(£42,000 –£3,500 –£840 –£16,250) = £21,410

Calculation:

21,410 / 213,000 x 100 = 10.05

What does this result mean?

A 10.05% cash on cash return means your commercial investment is producing a solid return on the capital you’ve put in, before accounting for taxes.

What is a good cash on cash return?

What qualifies as a “good” return depends on your organisation’s goals, location, and risk appetite. Here are some general benchmarks:

• 4–6% is considered conservative but stable; often found in prime areas or with long-term tenants.
• 8–12% is a healthy return for many property investors, balancing risk and reward with solid cash flow.
• 13% and above is a strong return, and therefore less typical, but it usually comes with higher risk—such as investing in undervalued areas, fixer-uppers, or volatile markets. In other words, most experienced private landlords would consider returns like this to require significant experience or specialised knowledge.

Context matters. A 6% return may be excellent in a central London location with long-term leases and low vacancy risk. Meanwhile, a 14% return in a struggling high street location may signal higher vacancy or maintenance concerns. Always consider:

• Local market conditions.
• Interest rates and lending terms.
• Your company’s risk profile.
• Strategic investment goals (e.g., cash flow vs. capital growth).

Cash on cash return versus other metrics

Cash on cash return is only one piece of the puzzle. Here’s how it compares to other popular real estate investment metrics:

Cash on cash return vs. return on investment (ROI)

While they might sound similar, cash on cash return and ROI are different in how they measure success:

• ROI looks at total return over the life of an investment, including appreciation, loan repayments, and resale profits.
• Cash on cash return focuses solely on annual cash income relative to the cash you’ve put in.

ROI is an important metric to look at when evaluating a real estate investment’s long-term performance or sale potential.   

Capitalisation rate (cap rate)

This is the net operating income divided by the property’s market value.

You can use this to compare value across different properties without factoring in financing.

Internal rate of return (IRR)

This metric looks at the annualised return over the life of an investment, accounting for time and cash flow. Use it when analysing multi-year investments or development projects.   

When to use cash on cash return

Cash on cash return is best used when you’re evaluating:

• How much cash flow a property produces annually.
• The efficiency of your business’s cash investment.
• Financing scenarios (since it’s based on cash invested, not the total purchase price).

It’s especially helpful for commercial buy-to-let strategies or to compare multiple investment opportunities.

What does cash basis mean on a tax return?

Understanding how your finances are recorded helps make sense of your pre-tax cash flow. Cash basis accounting is often used by small companies and landlords, and is limited by HMRC rules to income below £150,000 annually.

If using this method, you report your income when it’s received, and your expenses when they’re paid.

It reflects your real-time cash position. For example, if you receive rent in December for January, it’s recorded in December. In other words, income is recorded when it’s physically received, regardless of the rent period it covers.

If your annual rental income exceeds £150,000 then you must switch to accruals basis accounting. Limited companies and limitied liability partnerships also must use the accruals basis unless special rules or exemptions apply.

How is cash basis different from accruals basis accounting?

The accruals basis method of accounting records income and expenses when they are earned or incurred, regardless of when cash is received or paid.

For example, rent is recorded when due—even if it’s unpaid—and any costs for repairs are recorded when they’re billed for, even if the bill is paid in a different month.

Accruals basis accounting—also known as traditional accounting—is a better method for larger companies that need a clearer long-term picture. In fact, they may be required to use accruals accounting under UK GAAP/FRS 102 and IFRS. However, smaller businesses or individuals can choose to use accrual basis in preference to cash basis, if they wish, regardless of their size or income.

Why this matters for property businesses

Most smaller property investors and companies use cash basis. It aligns with cash on cash return calculations and offers a clearer view of cash flow. For tax purposes, HMRC allows many small businesses to use the cash basis method, simplifying reporting.

Common cash on cash return mistakes to avoid

Cash on cash return is straightforward but easy to get wrong if you overlook key details. Here are some common pitfalls to avoid:

Ignoring hidden costs

Always include every out-of-pocket cost in your total cash invested calculation. Don’t forget legal fees, insurance, repairs, or periods without rent. These affect your actual return.

Overestimating rental income

Don’t assume you’ll collect 100% of rent all the time. Tenants move out. Repairs happen. Build in a vacancy rate (usually 5-10%) and estimate conservatively to help avoid over-promising returns.

Confusing cash flow with profit

Your pre-tax cash flow isn’t the same as your total profit. For example:

• You can have strong cash flow but still be unprofitable on paper due to depreciation or interest payments.
• You may show profit but have negative cash flow if your expenses exceed rental income.

Cash on cash return focuses on cash flow, not paper profit—that’s both a strength and a limitation.

Overlooking tax and debt service

Cash on cash return is pre-tax. So, if you’re in a high tax bracket, your real return could be lower.

Similarly, if you have variable-rate loans, future interest changes could affect your returns. Always factor in corporation tax, income tax (if applicable), and loan interest or changes in interest rates.

Final thoughts

Understanding cash on cash return gives you a powerful tool to assess property investments.

Use it to measure the performance of capital invested and compare multiple property investment opportunities.

You can also apply it to make decisions on financing and yield expectations.

Just remember—cash on cash return is only part of the picture.

Combine it with ROI, cap rate, IRR, and your organisation’s goals to get a full view of any property investment opportunity.

With IFRS-compliant financial services accounting software you can simplify and automate the analysis of your real estate investment options.

Leverage real-time insights and strategic planning tools to make data-driven decisions and stay compliant, while growing your business.