Cash-on-cash return tells you how much cash lands in your account each year. IRR tells you the annualized return on the whole hold, including the sale and the timing of every dollar. Equity multiple tells you how many times you got your money back. You need all three, because each one hides something the others reveal.
Three Metrics, Three Different Questions
| Metric | Formula | Question it answers | Blind spot |
|---|---|---|---|
| Cash-on-cash | Annual pre-tax cash flow / Equity invested | How much income does this pay me this year? | Ignores the sale, loan paydown, and time value |
| IRR | Discount rate that makes NPV of all cash flows = 0 | What is my annualized return over the whole hold? | Sensitive to exit assumptions; favors quick flips |
| Equity multiple | Total cash returned / Equity invested | How much wealth did this create per dollar? | Ignores how long it took |
A Worked Example
Buy a small triple net retail property for $2.00M at a 7.0% cap rate ($140K NOI). Borrow $1.30M (65% LTV) at 6.5% on a 25-year amortization, and spend $40K on closing costs, so equity is $740K. Rent bumps 2% a year. Sell after year 7 at a 7.25% cap rate, with 3% selling costs.
| Year | NOI | Cash flow after debt | Cash-on-cash |
|---|---|---|---|
| Year 1 | $140K | $35K | 4.7% |
| Year 2 | $143K | $37K | 5.1% |
| Year 3 | $146K | $40K | 5.4% |
| Year 4 | $149K | $43K | 5.8% |
| Year 5 | $152K | $46K | 6.2% |
| Year 6 | $155K | $49K | 6.7% |
| Year 7 | $158K | $52K | 7.1% |
| Sale (yr 7) | $1,036K | Net of loan payoff and costs |
Year 1 cash-on-cash is only 4.7%, which sounds weak. But the loan is paid down every month, rent grows, and the sale returns $1,036K. Across the hold the deal produces a 9.9% IRR and a 1.81x equity multiple. Judging this deal on cash-on-cash alone would have undersold it.
When Each Metric Misleads You
What Good Looks Like for Net Lease Investors
Stabilized triple net properties are income investments, so investors usually care most about steady cash-on-cash and treat the sale as a secondary return. As a rough guide in the current rate environment: investment-grade single-tenant deals often pencil at 5% to 7% cash-on-cash and 7% to 10% levered IRRs; multi-tenant and value-add retail should target 8%+ cash-on-cash and 12% to 16% IRRs to compensate for leasing risk. If cash-on-cash stays below your loan rate for years, leverage is costing you current income, so make sure rent growth and the exit justify it.
Frequently Asked Questions
Should I use levered or unlevered IRR?
Use unlevered IRR to judge the property itself and compare it to other assets. Use levered IRR to judge your specific deal structure. A good property with bad debt can still be a bad investment.
Does cash-on-cash include loan principal paydown?
No. Standard cash-on-cash uses cash flow after the full mortgage payment. Principal paydown shows up in IRR and the equity multiple when you sell or refinance.
What about taxes?
All three metrics are usually shown pre-tax. Depreciation can make after-tax cash-on-cash meaningfully higher, especially with a cost segregation study.
Bottom Line
Use cash-on-cash to make sure the property pays you to own it, IRR to compare deals with different timing, and equity multiple to confirm you are actually building wealth. A deal that looks great on only one of the three deserves a closer look.
Educational content only, not legal, tax, or investment advice. Figures in examples are illustrative. Confirm specifics with your attorney, CPA, and lender before acting.