Cash-on-Cash Return: What’s Actually Good for Commercial Property?

Evan Willoughby

If you’re trying to size up a commercial property investment, cash-on-cash return should be one of your go-to numbers. Forget the fancy talk—this metric tells you, in plain English, what percentage of your actual cash investment you’re getting back every year before taxes. Simple math: annual cash flow divided by your upfront cash.

Why bother with this? Because a property can look amazing on paper but kill your wallet in real life. Cash-on-cash return shows what’s really landing back in your pocket, not just some paper profit. That’s how investors cut through the noise—and spot the real money-makers from the duds.

• What Cash-on-Cash Return Really Means
• What Numbers Count as 'Good'—and Why
• Pitfalls: When a 'High' Return Isn’t So Great
• Tips to Boost Your Cash-on-Cash Return

What Cash-on-Cash Return Really Means

Cash-on-cash return is probably the quickest way for you to see how your down payment is working in a property deal. Here’s the deal: You take the net cash flow you get every year—that’s income after paying the mortgage, taxes, and basic expenses, but before income tax—and divide it by the actual cash you’ve put in. In commercial real estate, this number cuts through the fluff and tells you the honest story of your investment’s yearly payoff.

Let’s break it down with some numbers. If you invest $200,000 from your own pocket and your property puts $20,000 in your bank account after covering all bills and the loan, your cash-on-cash return is 10% ($20,000 ÷ $200,000). This helps you compare properties with different prices, loan terms, or even locations without needing a finance degree.

So, why does everyone talk about it? Because in the commercial property world, most people use some leverage, meaning you borrow most of the purchase price. That makes what you actually shell out pretty different from the full “property value.” Cash-on-cash return cares only about the money you really put in—not paper equity or market guesses.

Here’s an easy cheat sheet for the formula:

• Net annual cash flow (before income tax): All cash that hits your account after paying operating costs and your mortgage, but before you deal with income tax.
• Total cash investment: Everything you paid at closing—down payment, loan fees, and even points or commissions if you’re counting every dollar.

Quick side note: This metric ignores appreciation, tax effects, or principal paydown. It’s all about “How much real money is coming to me now for what I put in?”

Check this simple table to see how it measures up against other popular metrics:

End of the day, cash-on-cash return is brutally honest—it’s about returns you can actually spend, not what’s someday possible if the stars align. No fluff or fantasies here.

What Numbers Count as 'Good'—and Why

So, what does a “good” cash-on-cash return actually look like when you’re staring at the numbers on a new commercial property deal? In 2025, most investors still think 8-12% per year is solid. Anything under 6% feels lackluster, unless the property has insane growth potential. Go north of 14%, and it grabs attention—but you’ve gotta wonder what’s being risked for those sky-high numbers.

There's no magic minimum because it depends on the deal, the location, how much you’re putting down, and what other investments can offer. Still, here’s what today’s market is showing for cash-on-cash returns:

Keep one thing in mind: if you see double-digit returns in big metro areas like Dallas or Miami, double-check what's behind that number. Are you taking on extra risk, like short-term leases or an old building with deferred maintenance?

Smart investors also compare cash-on-cash to other places they could put their money—like stocks, bonds, or savings. According to recent Fed data, average high-yield savings accounts are giving you 5% or less right now. If a property’s not beating that, it might not be the best use of your cash.

• 8-12%: Considered strong, especially with stable tenants and low repairs.
• Below 6%: Only makes sense if you think rents or property value will jump soon.
• 13% and above: Worth a closer look at risks—sometimes it's too good to be true.

Make sure you’re comparing apples to apples. Always check if the calculations include all your real costs: loan payments, management, repairs, even projected vacancies. If a broker can’t break down their math, walk away.

Pitfalls: When a 'High' Return Isn’t So Great

Spotting a sky-high cash-on-cash return can feel like you hit the real estate jackpot—until you look closer. Just because a deal flashes a huge percentage doesn't always mean it’s a winner. In fact, it’s often the opposite, especially in the commercial property world.

Here’s why you should be cautious: High cash-on-cash returns are sometimes tied to risky properties. Think old buildings in rough neighborhoods or businesses losing tenants left and right. Sellers might hype up the numbers using temporary rent boosts or leaving out real expenses like maintenance and vacancy losses.

• Watch for weak tenants: A building full of small, shaky businesses isn’t as stable as one with established companies.
• Deferred repairs: If the property looks great on paper but needs a new roof and HVAC soon, those big repairs will eat up your cash flow fast.
• Understated expenses: Slick marketing sheets sometimes leave out line items like vacancy loss, capital reserves, or regular updates—stuff every honest investor tracks.
• Short-term rent tricks: Some sellers offer artificially high first-year rents just to raise the deal’s cash-on-cash number at closing.

Let’s check out a quick comparison of what’s going on under the hood with different properties offering the same initial cash-on-cash return:

So, if something looks too good, slow down and check:

1. Are the tenants likely to stick around and pay?
2. Did the seller skip expensive repairs or real cost estimates?
3. Is rent above market, or is there a risk of it dropping?
4. Does the property have a history of vacant units or lost income?

Bottom line: An extra-high cash-on-cash return often means extra work, higher risk, or surprise costs down the road. Don’t just chase big numbers—dig into the details and make sure the story lines up with reality.

Tips to Boost Your Cash-on-Cash Return

Improving your cash-on-cash return isn’t rocket science. Small tweaks can add up fast, especially in commercial property. The idea is simple: either bring in more cash from the property or lower the amount you’ve got tied up in it. Here’s how you get there.

• Increase rents strategically: Even a 3% bump in rental rates can seriously move the needle on your cash flow. Look at comparable properties—if you’re undercharging, you’re leaving money on the table.
• Cut unnecessary expenses: Think insurance, utilities, maintenance contracts, and property management fees. For instance, switching trash collection companies or renegotiating landscaping can shave off hundreds each month and juice your net income.
• Use smart financing: A lower interest rate or longer loan term can mean smaller monthly payments. That’s money staying in your pocket, not going to the bank.
• Add value: Upgrades like better lighting, energy-efficient HVACs, or creating small spaces for extra tenants can boost rent and attract better tenants. Quick wins like this often require less cash than expected.

If you want to see real numbers, check out this quick table showing how small adjustments impact return on a $1 million commercial deal:

Here’s a bit of wisdom from Mark Ferguson, seasoned real estate investor:

“If you want stronger cash-on-cash return, focus on properties where value can be added. Don’t just look at what it is—see what it could be after you improve it.”

Remember, the best moves balance improved income with manageable expenses and smart leverage. A mix of little wins—higher rent, trimmed costs, a sharper loan—can push your returns higher without extra risk.