Ask two investors how a deal performed and one will quote cash-on-cash, the other IRR. They’re both right — they’re just measuring different things. Confusing them leads to buying the wrong deal.
What each one measures
Cash-on-cash return = annual pre-tax cash flow ÷ total cash invested. It’s a single-year snapshot of the return on your equity, and it ignores appreciation, loan paydown, and the eventual sale.
Internal rate of return (IRR) is the annualized, time-weighted return across the entire hold — the equity you put in, every year’s cash flow, and the proceeds when you sell. Because it discounts for timing, IRR rewards getting money back sooner.
Side by side
| Cash-on-cash | IRR | |
|---|---|---|
| Time horizon | One year | Full hold + sale |
| Accounts for timing? | No | Yes |
| Includes the sale? | No | Yes |
| Best for | Year-one yield / debt-coverage feel | Comparing whole-hold performance |
| Where it misleads | Ignores exit & appreciation | Can look great on a short hold with little total profit |
Why they diverge
A deal with modest year-one cash flow but a big value-add jump at sale can post a low cash-on-cash and a high IRR. A stabilized building with strong current cash flow but little upside can do the reverse. Cash-on-cash tells you how the deal feels while you own it; IRR tells you how it actually performed start to finish.
Worked example
You invest $850,000, collect about $47,000 a year in cash flow (roughly 5.5% cash-on-cash), and sell after five years for $1,100,000 net. The cash-on-cash stayed near 5.5% the whole time — unremarkable. But because of the sale proceeds and loan paydown, the IRR lands around 18%. Same deal, two very different-looking numbers, each true.
The takeaway
Use cash-on-cash for the year-one reality check and IRR for the full-hold verdict — and always read IRR next to the equity multiple so a flashy short-hold number doesn’t hide a small total profit. Model both in the IRR calculator and cash-on-cash calculator, or run the whole projection in the deal analyzer.
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IRR Calculator →Cash-on-Cash Calculator →Deal Analyzer →Frequently asked questions
Is IRR or cash-on-cash more important?
Neither alone — they answer different questions. Cash-on-cash measures a single year’s return on your equity; IRR measures the annualized return over the entire hold including the sale. Serious investors look at both, plus the equity multiple.
Why is my IRR higher than my cash-on-cash?
Usually because IRR includes the sale proceeds and loan paydown at exit, which cash-on-cash ignores entirely. If a property appreciates or you build equity through amortization, the exit boosts IRR well above the year-to-year cash-on-cash.
What is a good IRR for commercial real estate?
It varies with risk and hold length, but many investors target roughly 12–20% IRR on value-add commercial deals and lower on stabilized, lower-risk assets. Always weigh the IRR against the risk taken and the equity multiple.