Cash-on-cash return

Cash-on-cash return answers a plain question: for every dollar of equity I put into this building, how many cents come back to me this year after the mortgage is paid? It ignores appreciation, loan paydown, and taxes. It is a snapshot of one year, not a lifetime return like the internal rate of return.

Cash-on-cash = (NOI − annual debt service) ÷ equity invested

Our default rent math uses an 8% cash-on-cash target as the equity return a new building must produce. It is a deliberately simple stand-in for the more elaborate targets investors use in practice, chosen because it is transparent and because the reader can change it and see what happens. Under our sensitivity, a 6% target implies a required rent of $2,006 in the illustrative building, 8% implies $2,154, and 10% implies $2,301.

Cash-on-cash is affected by leverage. Borrowing more raises the return on the smaller equity slice if the building's yield exceeds the loan's cost, and lowers it if not. That is why investors watch the spread between yield on cost and the mortgage constant closely: it decides whether debt helps or hurts.