Cash on Cash Return on Commercial and Multifamily Deals

Cash on cash return in commercial real estate means the same thing it means on a house. It is the cash a property pays you in a year divided by the cash you put into the deal. What changes on commercial and multifamily deals is nearly everything feeding those two numbers. The lender sizes the loan instead of you, the loan pays off over a shorter schedule, the expense list is longer, and the money due at closing includes items a single family buyer never sees.

How to calculate cash on cash return in commercial real estate

Annual pre-tax cash flow divided by total cash invested.

Cash flow is net operating income minus annual debt service. Net operating income is rent collected after vacancy, minus operating expenses, before the loan and before depreciation. Debt service is twelve months of payments, principal and interest together.

What counts as cash invested on a commercial deal

• The equity left over after the lender’s loan amount
• Closing costs: title, transfer taxes, survey, your legal fees
• Loan costs: origination points, lender legal, appraisal, property condition report, environmental report
• Upfront repairs, unit turns and deferred maintenance you fund yourself
• Any reserve or escrow you wire at closing

Money the lender funds is not your money. A repair holdback drawn from loan proceeds stays out of the denominator. A reserve funded from your own account goes in.

The lender decides how much you put down

On a rental house you choose 20% or 25% down. On commercial property the lender starts from the income instead. It picks a debt service coverage ratio, commonly 1.20 to 1.30 on stabilized apartments though it moves with the lender and the market, and lends whatever the property’s income supports at that coverage. Your down payment is the leftover. Thin income means a bigger check from you.

The second difference is the amortization. Residential loans run 30 years. Commercial loans are often written over 20 or 25, with a balloon at year 5, 7 or 10. A shorter schedule means higher payments on the same balance, which raises the mortgage constant:

Term at 7.25%	Mortgage constant
30 years	8.2%
25 years	8.7%
20 years	9.5%

Nothing about the building changed. The money just goes back to the lender faster, and it comes out of your cash flow.

A ten unit version of the standard example

Take the deal the calculator uses by default and repeat it ten times: ten units at $500,000 each, renting for $5,200 a month each, with $10,000 of rehab each. That is a $5,000,000 building renting for $52,000 a month. Net operating income runs $402,100, so the cap rate is about 8.0%.

Financed like a house, 25% down over 30 years at 7.25%, it returns 6.3% on $1,500,000 of cash. Same as one unit, because it is one unit ten times.

Now size it the way a commercial lender would. At 1.25 coverage, the most debt service the building supports is $321,700 a year. At the 25 year constant of 8.7%, that funds a loan near $3,710,000, or 74% of the price.

• Cash in: $1,290,000 of equity, $100,000 of rehab, $150,000 of closing costs, so $1,540,000
• Cash flow: $402,100 of income less $321,700 of debt service, so $80,400
• Cash on cash return: 5.2%

Same rents, same expenses, same interest rate. The return fell from 6.3% to 5.2% because the loan pays off over 25 years instead of 30.

Push the coverage requirement to 1.35 and the loan drops to about $3,434,000. Cash in rises to $1,816,000, cash flow rises to $104,200, and the return goes up to 5.7%. Less debt, better return, because the 8.7% constant sits above the 8.0% cap rate and borrowed dollars cost more than they earn. Cash on cash return and leverage walks through that flip.

What multifamily adds to the expense side

A vacant house earns nothing. A vacant unit in a twenty unit building costs you 5% of the rent roll, so vacancy becomes a steady deduction rather than an occasional disaster.

Four costs that barely exist on a rental house and matter here: onsite payroll once a property is large enough, owner paid water, sewer and trash, replacement reserves the lender escrows per unit per year, and turn costs on every lease that rolls. The reserve is real cash leaving your account, so it belongs in net operating income. Running a 35% expense ratio borrowed from a single family rule of thumb is the most common way these deals look better on paper than they are.

Commercial leases change both sides

A lease on a commercial space can run five or ten years with the tenant paying taxes, insurance and maintenance. Take one unit from the example and lease it that way. The $6,000 of property tax and $2,400 of insurance come back as reimbursements, so net operating income on that $500,000 space rises from $40,210 to $48,610 and the cap rate reaches about 9.7%. At 25% down over 30 years the return is near 11.9%.

The trade is that occupancy is 0% or 100%, and rollover brings tenant improvement money and leasing commissions, which are large cash outlays that never appear in net operating income. A landlord holding single tenant space should reserve for them.

What is a good cash on cash return for commercial real estate

There is no number that holds across markets. Use two reference points from the deal in front of you.

The first is the all cash return the calculator shows beside the financed one. If the financed figure is higher, the loan is adding to your return. If it is lower, you are paying for the debt.

The second is the cap rate. The gap between the cap rate and the loan constant sets the range, not the property type. At an 8% cap with a constant just above it, a stabilized building lands near 5 to 6.5% in year one and nothing is wrong with it. Where cap rates sit well above loan costs, the same building can print 9% or more. Cash on Cash Return vs Cap Rate explains why the two move apart. For a sense of how the common targets read, see whether 7% is good.

Value add deals are a separate case. Year one can be near zero by design while units are renovated. Judge those on the stabilized year, and say which year you are quoting.

Run your own numbers

Put the purchase price, rent roll, operating expenses and loan terms into the cash on cash return calculator on the home page. Enter the building total, not a per unit figure, and include the reserve and the loan fees so the cash invested line matches what you would actually wire.