Why Cash-on-Cash Return Is Not Enough to Evaluate a Deal

Cash on cash return is the headline number in most LP pitch decks. It is the number sponsors quote. It is the number investors remember.

Used alone, it can mislead. Here are the other metrics that should be part of every evaluation.

What Cash on Cash Measures

Annual pre-tax cash flow divided by equity invested. If you put in 100 thousand dollars and receive 8 thousand in distributions, your cash on cash is 8 percent.

It is a simple, intuitive metric. It captures the immediate income return on your capital.

What Cash on Cash Misses

Capital appreciation. The value of the asset grows over time. That growth is part of your return but does not show up in cash on cash.

Principal paydown. Your portion of the loan principal is being paid down by tenant rent. That equity build is part of your return.

Depreciation. The tax shelter from depreciation is real. It does not show up in cash on cash but it affects after tax return.

Total Return Components

A complete return calculation includes. Current cash flow. Principal paydown. Appreciation. Tax benefits. Subtract any losses.

On a typical multifamily deal, cash on cash might be 7 percent, principal paydown another 2 percent, appreciation another 4 to 6 percent, and depreciation tax shield worth another 2 to 4 percent depending on your tax bracket.

Total return can be 15 to 20 percent on a deal with 7 percent cash on cash. That is the math people miss.

IRR vs Cash on Cash

Internal rate of return accounts for the timing of cash flows. It captures both ongoing distributions and the capital return at exit. It uses time value of money.

A deal with 7 percent cash on cash and a strong exit might have a 16 percent IRR. A deal with 9 percent cash on cash and a weak exit might have a 10 percent IRR.

IRR tells the complete return story. Cash on cash tells only the current income story.

Equity Multiple

Equity multiple is total cash returned divided by capital invested. A 1.8 multiple means you got 1.80 back for every 1 dollar invested over the hold period.

This captures total return without the time value adjustment. Simpler than IRR. Useful for comparing across deals with similar hold periods.

Why Cash on Cash Still Matters

Despite its limitations, cash on cash captures something important. The current income you can actually spend or reinvest.

Some investors care more about current income than appreciation. Retirees. Foundations. People with specific cash flow needs. For them, cash on cash is the primary metric.

The Full Picture

Look at all the metrics together. Cash on cash for current income. IRR for total return with time value. Equity multiple for total return without time value. Tax benefits for after tax math.

Sponsors who only quote one number are simplifying. Sometimes that is appropriate. Sometimes it is hiding something. Ask for the full set.

These figures are illustrative only and do not represent the returns of any specific Top Tier offering; actual returns may be higher or lower.