Cash-on-Cash Return
Before tax cash flow (BTCF = CFO – Debt Service) divided by the total equity contribution to date, expressed on an annual basis as a percentage.
Cash-on-Cash Return = Before Tax Cash Flow ÷ Total Equity Contribution to Date
Before tax cash flow is often referred to as Cash Flow after Financing, and is equal to Cash Flow from Operations less debt service.
The Cash-on-Cash Return of an investment is important when looking at stabilized cash flow on an annual basis. The Cash-on-Cash Return is typically used alongside other return metrics such as the Equity Multiple, Internal Rate of Return, and Free and Clear Return to appropriately assess an investment. Click here to learn when to use the Cash-on-Cash return.
Putting ‘Cash-on-Cash Return’ in Context
Scenario:
Heartland Realty Fund, an open-end fund that is part of the NCREIF Fund Index – Open End Diversified Core Equity (NFI-ODCE), recently acquired Northfield Village Center, a well-established grocery-anchored retail center located in suburban Dallas, Texas. The property consists of 120,000 square feet of retail space, anchored by a national grocery chain that occupies 50,000 square feet. The remaining space is leased to a mix of local and national tenants, including a fitness center, restaurants, and boutique retail shops.
About ODCE Funds:
The NFI-ODCE (often pronounced as “odyssey”) is an index tracking the performance of some of the largest private real estate funds that pursue lower-risk investment strategies. These funds typically use low leverage and focus on stable, income-generating properties across the U.S. ODCE funds are open-end vehicles, meaning they have an infinite life, with multiple investors who can enter or exit the fund periodically, offering a degree of liquidity. The index has been a standard in the industry since 1978 and provides a benchmark for institutional core private real estate returns.
Property Financials:
- Purchase Price: $30 million
- Loan Amount (30% LTV): $9 million
- Total Equity Contribution: $21 million
- Annual Debt Service: $540,000 (Interest-only loan with a 6% interest rate)
- Net Operating Income (NOI): $2.1 million
- Before Tax Cash Flow (BTCF): $1.56 million (NOI of $2.1 million – Debt Service of $540,000)
Calculating Cash-on-Cash Return:
The portfolio manager at Heartland Realty Fund evaluates the performance of Northfield Village Center by calculating the Cash-on-Cash Return, an important metric for the fund given its focus on generating stable, current income for its investors.
Cash-on-Cash Return = Before Tax Cash Flow (BTCF) ÷ Total Equity Contribution to Date
Cash-on-Cash Return = $1,560,000 ÷ $21,000,000 = 0.0743 or 7.43%
Analysis:
For Heartland Realty Fund, the 7.43% Cash-on-Cash Return aligns well with its core investment strategy, which prioritizes consistent and predictable income streams. While slightly lower than earlier projections due to the increased interest rate environment, this return is still within acceptable ranges for ODCE fund performance. The stability offered by the long-term lease with the grocery anchor contributes to the fund manager’s confidence in the property’s ability to generate steady cash flow. The 7.43% Cash-on-Cash Return supports the fund’s objective of delivering consistent returns to its investors while maintaining a lower risk profile.
This scenario illustrates how an ODCE fund like Heartland Realty Fund relies on the Cash-on-Cash Return metric to assess the ongoing income performance of its assets, ensuring that they meet the fund’s objectives of delivering stable returns to its investors.
Frequently Asked Questions about Cash-on-Cash Return in Real Estate
What is Cash-on-Cash Return?
Cash-on-Cash Return is defined as “Before tax cash flow (BTCF) divided by the total equity contribution to date, expressed on an annual basis as a percentage.” It measures the income return on the actual cash invested by equity holders.
How is Cash-on-Cash Return calculated?
The formula is:
Cash-on-Cash Return = Before Tax Cash Flow ÷ Total Equity Contribution to Date
In the example, BTCF is $1.56 million and equity is $21 million, so:
$1,560,000 ÷ $21,000,000 = 7.43%
What is Before Tax Cash Flow (BTCF)?
BTCF is the Net Operating Income (NOI) minus the debt service. It is also referred to as “Cash Flow after Financing.”
In the scenario: BTCF = $2.1 million (NOI) – $540,000 (Debt Service) = $1.56 million.
Why is Cash-on-Cash Return useful?
It helps assess an investment’s income performance based on the actual equity invested. It’s particularly useful for stabilized assets generating consistent cash flow. As stated, “The Cash-on-Cash Return of an investment is important when looking at stabilized cash flow on an annual basis.”
How does Cash-on-Cash Return relate to other real estate return metrics?
Cash-on-Cash Return is typically used in combination with other metrics such as the Equity Multiple, Internal Rate of Return (IRR), and Free and Clear Return to fully assess investment performance.
What does the Heartland Realty Fund example demonstrate?
It shows how an ODCE fund uses Cash-on-Cash Return to measure current income performance. The 7.43% return “aligns well with its core investment strategy, which prioritizes consistent and predictable income streams.”
What kind of properties is Cash-on-Cash Return most appropriate for?
This metric is most appropriate for stabilized, income-generating properties. As noted, ODCE funds focus on “stable, income-generating properties,” and use Cash-on-Cash Return to monitor ongoing performance.
Does leverage affect Cash-on-Cash Return?
Yes, because BTCF subtracts debt service, a property with more debt (and thus higher debt service) will have a lower BTCF and lower Cash-on-Cash Return, all else equal. In the scenario, the interest-only loan at 6% results in $540,000 annual debt service.
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