Understanding Cash-on-Cash Return

Cash-on-cash return shows how much income your upfront capital produces in the first year of ownership. It compares the cash you receive after expenses and mortgage payments with the total cash you invested. This helps you quickly judge whether the property comfortably supports your ownership costs before diving into the details.

Cash flow is a key element of cash-on-cash return, and flow refers to the income left after service charge arrangements, insurance, maintenance allowance, and mortgage payments. Keep in mind that metrics like lease structure affect these items, so two similar buildings can produce very different results.

Key parts of the calculation

• Your cash invested: deposit, Stamp Duty Land Tax, legal fees, survey costs, and initial works.
• Cash flow: rent received after service charge arrangements, insurance, maintenance allowance, and mortgage payments.

How Do You Calculate Cash-on-Cash Return?

Divide your annual pre-tax cash flow by your total cash invested.

Start by estimating your annual pre-tax cash flow using information from the property's rent roll, lease, and other documents. This is the expected income left after operating expenses, allowances, and mortgage payments. Then divide that by your total cash invested. This simple ratio quickly highlights whether a deal feels sustainable or fits your risk and income expectations.

Cash-on-Cash Return Formula

For example, if you invest £120,000 and the building produces £12,000 of annual pre-tax cash flow, the cash-on-cash return is 10%. This gives you a quick sense of whether the property can support your goals without requiring detailed financial modelling.

Your cash invested includes your full upfront purchase and professional costs. Many buyers focus only on the deposit, but listing all costs keeps the calculation accurate. Your annual cash flow should also reflect realistic assumptions for market rent, vacancy and service charge arrangements.

What Is a Good Cash-on-Cash Return?

Typical targets change with the level of risk, the type of asset, and the financing in place.

A “good” cash-on-cash return varies by risk level. Prime buildings with strong tenants and long leases often produce lower returns because the income is stable and the asset is priced at a premium. Secondary buildings or those in emerging areas often show higher returns because they're priced lower to compensate for greater risks and responsibilities.

Understanding how different property characteristics affect cash-on-cash return helps investors assess whether a higher initial return justifies the additional risk.

These tradeoffs become clearer when you track actual cash flow over time rather than focusing solely on Year 1 performance. The chart below compares two properties with identical £100,000 investments: one offers a stable 5% initial return in a prime location with a strong tenant, while the other starts at 8.5% but carries the risks associated with secondary locations and weaker covenants.

A stable asset with lower initial cash-on-cash return can be a better long-term investment than a volatile asset that shows higher initial returns, but swings sharply because of short lease, void periods, rent-free incentives, and unexpected capex events that wipe out income.

Leverage also affects your cash-on-cash return. A sensible loan can lift your return because you invest less upfront. A higher-cost loan or strict coverage requirements can reduce it. The aim is not the lowest possible payment, which may come with riskier leverage or refinance struggles down the line, but a manageable payment that the rent can realistically support.

Most investors compare a handful of deals side by side rather than chasing the highest cash-on-cash figure. A stable, well-maintained building with predictable income often performs better over time than one with a high initial return that reflects greater uncertainty.

How Should First-Time Investors Use Cash-on-Cash Return When Comparing Deals?

Use it as a quick screen, then dig deeper into risk, leases, and long-term returns.

Cash-on-cash gives you a quick way to compare how efficiently multiple properties use your upfront capital. This is especially useful when you want a structured way to filter listings without spending too much time on each one.

To keep comparisons fair, use the same assumptions across each property:

• Use average vacancy allowances per property type.
• Use realistic financing terms for the asset type.
• Base rent on realistic market levels.
• Apply consistent repair and maintenance allowances.
• Include rent-free periods or incentives where relevant.

Running the same assumptions across offices buildings, industrial units or retail properties can help you see how different sectors behave under similar conditions.

Once you calculate the return, look at what drives the number to get a more thorough investment picture. For example, a building with a slightly lower return may offer a long lease, a strong tenant or lower long-term capex. A higher return may signal opportunity but also reflect more volatility.

Understanding these tradeoffs helps you narrow your shortlist with confidence. For instance, a slightly lower return might still make sense if the location and layout support your future plans or provide steadier income over several years.

What Are the Limits of Cash-on-Cash Return?

It is a one-year snapshot and ignores taxes, capital growth, and debt paydown.

Cash-on-cash return is useful, but it does not capture long-term performance. It focuses only on the first year of income, which may not reflect typical results. A property with a modest initial return may offer stable rental growth, while one with a high return may face vacancy risk.

The metric also excludes capital growth and the equity built through loan repayments, both of which can shift overall returns. Metrics such as internal rate of return (IRR) help capture these effects across the full holding period and provide a wider view of performance.

Illustrative example showing how cash-on-cash return alone can be misleading. Property B appears less attractive based on first-year cash flow (6% vs 8%), but delivers stronger overall performance (15% vs 12%) when capital growth and equity build-up are included. This shows why investors should use cash-on-cash return as an initial screen rather than a complete measure of investment performance.

Cash-on-cash return is usually calculated before tax. Two investors with identical pre-tax figures may have different after-tax outcomes depending on their structure.

First-year results can also be distorted by rent-free periods, early refurbishment, or initial voids. This is why investors pair cash-on-cash return with other metrics, such as commercial property yield, net operating income (NOI), and debt coverage. Treat cash-on-cash as a starting point, not a full picture.

How Can You Apply Cash-on-Cash Return?

Build a simple model, test different scenarios, and apply it to real listings.

The steps below help you apply cash-on-cash return consistently when evaluating UK commercial properties.

Step 1: List the key inputs that shape your cash flow

A basic spreadsheet helps you compare properties consistently. Start by listing the key inputs: price, deposit, SDLT, professional fees, early repairs, rent, vacancy allowance, insurance, service charges and financing terms. Some of these figures vary by types of property ownership, particularly when reviewing leasehold assets.

Step 2: Test realistic scenarios

Each input shapes your first-year cash flow and adjusting the numbers helps you see how sensitive the return is to changes in rent or costs. This shows you where the deal still works and where it begins to tighten.

Step 3: Apply the model to real listings

Once your model is ready, use it whenever you review commercial properties for sale. This gives you a repeatable way to judge opportunities without overcomplicating the process.

Cash-on-cash return becomes most valuable when paired with a wider review of tenant strength, lease length, maintenance history, and long-term income potential. Together, these steps give you a structured way to apply the metric across different UK commercial listings.

Frequently Asked Questions

What is the difference between cash-on-cash return and market yield?

Market yield measures income as a percentage of the property's price Cash-on-cash return measures income relative to the capital you have at risk in the deal. Yield does not account for financing or purchase costs. Cash-on-cash return shows how efficiently your personal capital is working.

How does cash-on-cash return differ from return on investment (ROI)?

Cash-on-cash also differs from return on investment (ROI), which often includes capital growth. Cash-on-cash keeps the focus on first-year income, which makes it easier to compare deals without relying on long-term projections.

Is cash-on-cash return calculated before or after tax?

It is usually calculated before tax to keep comparisons simple. Your after-tax income may differ depending on your structure. Review this separately to get a complete picture.

Can cash-on-cash return be negative, and what does that mean?

Yes. It can be negative if the building costs more to operate than it earns. This may happen during voids, early repair work, or when financing costs are high. A negative result signals that assumptions or property conditions need closer review.

Is cash-on-cash return more useful for buy-to-let or commercial property?

Although it's useful for both, cash-on-cash return is especially helpful when lease structures and costs vary. It provides a consistent starting point when comparing very different assets.