Cash on Cash Return in Private Equity and LBO Models
Cash on cash return in private equity means the money multiple, not a yearly yield. See how sponsors and LBO models quote it, with the math worked out.
By the CashOnCashReturnCalculator.com team
Cash on cash return in private equity usually means a multiple: total cash paid back to investors divided by the cash they put in. So 1.8x cash on cash means every equity dollar came back as $1.80 across the life of the deal, not every year.
Real estate investors use the same three words for an annual percentage. Both uses are correct in their own setting. You just have to know which one the table in front of you is quoting.
What does cash on cash return mean in private equity?
It is cumulative cash returned divided by cash invested over the whole holding period, written as a multiple. Fund and buyout models also call it the cash on cash multiple, the money multiple, or multiple on invested capital. Timing is ignored, so 2.0x in three years and 2.0x in nine years look the same.
The formula in both settings
Private equity version: cash on cash return = total cash distributions / total cash invested.
Rental version: cash on cash return = annual pre-tax cash flow / total cash invested.
Same idea on top, different clock. One adds up every dollar that ever came back. The other looks at a single year of operations.
| Where you meet it | What it divides | Shown as | Period |
|---|---|---|---|
| Rental analysis | Yearly pre-tax cash flow by cash invested | Percent | One year |
| Buyout or LBO model | All distributions by equity funded | Multiple | Full hold |
| Fund reporting | Distributions by paid-in capital (DPI) | Multiple | To date |
Why an LBO model rarely shows a yearly cash yield
In a leveraged buyout, most of the company’s free cash flow goes to paying down debt. Credit agreements often require it through a cash sweep.
The owner collects little or nothing while the deal is held. Annual cash on cash sits near zero for years, and the whole return lands at exit when the business is sold or recapitalized.
A rental works the other way. Rent arrives monthly, the mortgage is paid, and the owner keeps what is left. That steady flow is what makes an annual percentage useful, and its absence is why buyout tables quote multiples.
Debt drives the result in both cases. A larger loan shrinks the equity check and lifts the multiple when the plan works, and makes the loss worse when it does not. The rental version of that trade is worked through in how debt changes the return.
Turning the standard rental example into a sponsor’s return table
Start with the example used across this site. A $500,000 rental rents for $5,200 a month, with $10,000 of rehab, $6,000 of property tax and $2,400 of insurance. Net operating income runs $40,210. At 25% down over 30 years at 7.25%, cash flow is $9,460 a year on $150,000 of cash invested, so cash on cash is about 6.3%.
A private equity style table for a five year hold reads like this:
- Equity invested: $150,000.
- Operating distributions: $9,460 a year, or $47,300 over five years.
- Capital returned from operations alone: about 0.32x.
- Assume the sale returns $200,000 of equity after the loan payoff and selling costs.
- Total distributions: $247,300, a cash on cash multiple of about 1.65x.
That exit figure is an assumption, not a forecast. It moves with price growth, how much principal gets paid down, and what the sale costs, all of which vary by market.
A 1.65x over five years works out near 10.5% a year compounded. The 6.3% and the 1.65x describe the same property. One counts a year, the other counts the hold.
The simple tab behaves the same way. Put in $12,000 of annual cash flow on $150,000 invested and you get 8% a year, which is $60,000 of distributions, about 0.4x, before a dollar of sale proceeds.
Where the multiple sits next to IRR
A multiple answers how much came back. Internal rate of return answers how fast, because IRR weights each cash flow by when it arrives.
That is why sponsors show both. A quick flip can post a high IRR and a thin multiple. A long hold with steady distributions can post a strong multiple and a modest IRR. Neither number is wrong, and neither is complete on its own. The pair is compared in detail in cash on cash return vs equity multiple and MOIC.
Real estate private equity quotes both numbers
Property funds sit between the two conventions. Deals usually distribute quarterly, so the offering shows a cash on cash percentage for each year of the projection plus a multiple for the full hold.
A commercial property with a long lease to one tenant produces the steadiest version of that yearly figure, since the rent is contracted and the tenant often pays taxes and insurance. A value-add building with half the units empty may distribute nothing for two years, which looks much more like a buyout.
The loan matters as much as the lease. Commercial lenders size debt from the income and amortize it faster than a 30 year residential schedule, which pulls the early years down. That math is laid out in how a commercial lender sizes the loan.
Questions to ask about any quoted figure
- Is it a percent or a multiple?
- Does it cover one year or the entire hold?
- Is it before or after fund fees and the sponsor’s promote?
- Does it count refinance proceeds as a distribution?
- Is it pre-tax, and pre-tax for whom?
Two tables can both say cash on cash and differ by half the return. Ask before you compare.
Run the yearly number on your own deal
The Cash on Cash Return Calculator on the home page gives you the annual percentage from a purchase price, rent, loan terms and expenses. Once you have that figure, multiply it by your expected hold and add your exit assumption to get the multiple a sponsor would quote.
Frequently asked questions
What is the cash on cash return formula in private equity?
Total cash distributions divided by total cash invested. A fund that called $150,000 of equity and paid back $247,300 over the hold shows about 1.65x. The rental version of the formula divides one year of pre-tax cash flow by the same cash invested and reports a percentage instead of a multiple.
Is cash on cash return in private equity the same as the equity multiple?
In most return tables, yes. Cash on cash multiple, money multiple, multiple on invested capital and equity multiple all divide what came back by what went in. Small differences show up in what counts as a distribution, such as proceeds from a refinance, and whether the figure is measured before or after fund fees and the sponsor's promote.
Why is cash on cash return near zero in an LBO?
Because the company's free cash flow usually goes to paying down debt rather than to the owners. Many credit agreements require that sweep. The sponsor collects little during the hold, then the return arrives in one lump at exit. That is why buyout models quote a multiple for the whole period instead of a yearly yield.
Can I compare a rental's cash on cash return to a fund's?
Only after you convert one to match the other. A 6.3% annual return is not comparable to a 1.65x multiple until you fix the time period. Add up the rental's distributions across the same number of years, include the expected sale proceeds, then divide by cash invested. Check whether the fund number is before or after fees.