Real Estate Tax Calc
Cash-on-cash: annual, pre-tax
Cash-on-cash return measures one year's pre-tax cash flow against the cash you invested. Simple and great for quick screening, but it ignores appreciation, principal paydown, and time.
ROI: total return
ROI can capture the full picture — cash flow plus appreciation plus loan paydown — over your hold, but definitions vary, so compare apples to apples.
IRR: time-weighted
IRR accounts for when cash flows arrive, making it the most complete measure for comparing deals with different timelines — but it needs a full projection to compute.
The formulas side by side
Each metric is a different fraction. Cash-on-cash = annual pre-tax cash flow ÷ total cash invested — a one-year snapshot. ROI = total profit ÷ total cash invested, where 'total profit' can include cash flow, principal paydown, and appreciation over the whole hold (definitions vary, so always ask what is in the numerator). IRR has no simple closed form: it is the discount rate that makes the net present value of every cash flow — your initial investment, each year's cash flow, and the net sale proceeds — equal zero. In practice you solve for it with a spreadsheet's IRR or XIRR function. The key structural difference is that cash-on-cash and simple ROI ignore timing, while IRR is built entirely around it: a dollar received in year one is worth more than a dollar received in year ten, and only IRR reflects that.
A worked example showing why they diverge
Buy a rental for $200,000 with $50,000 down (including closing costs and rehab). It throws off $4,000 a year in cash flow. In year five you sell for a $60,000 gain and have paid down $10,000 of principal. Cash-on-cash = $4,000 ÷ $50,000 = 8% — clean and simple, but it says nothing about the sale. Total ROI over five years = ($4,000 × 5 cash flow + $10,000 paydown + $60,000 appreciation) ÷ $50,000 = $90,000 ÷ $50,000 = 180% cumulative, or about 36% per year averaged — but that average ignores that most of the gain came at the end. IRR discounts each year's $4,000 and the lump-sum sale in year five, landing somewhere around 22–24% annualized. The three numbers describe the same deal yet look wildly different, which is exactly why you must know which one you are quoting.
Equity multiple: the fourth metric worth knowing
Investors often pair IRR with the equity multiple, which is total cash returned ÷ total cash invested. In the example above, you got back $20,000 of cash flow plus roughly $110,000 of net sale proceeds on a $50,000 investment — an equity multiple of about 2.6x. The equity multiple answers 'how many times did I get my money back?' while IRR answers 'how fast?' The two can disagree: a deal can have a high IRR but a low multiple (a quick flip that doubles a small base) or a high multiple but a modest IRR (a long hold that triples your money over 20 years). Sophisticated investors look at both, because IRR alone rewards speed in a way that can favor churn over durable wealth-building.
When each metric misleads
Every metric has a blind spot. Cash-on-cash ignores appreciation and paydown, so it undersells a low-cash-flow property in a growth market. ROI is definition-dependent and, when averaged over a multi-year hold, hides the timing of returns. IRR can be gamed: because it assumes interim cash flows are reinvested at the IRR itself, a high IRR on a short hold can overstate reality, and IRR is very sensitive to your assumed sale price and exit year — small changes in the terminal value swing it dramatically. IRR can also produce misleading or multiple values when cash flows change sign more than once (for example, a mid-hold capital call). Treat a single headline number with suspicion and always check the assumptions behind it.
After-tax versions and why they matter
All three metrics are usually quoted pre-tax, which keeps deals comparable across investors. But your real return is after-tax, and rental real estate is unusually tax-advantaged. Depreciation shelters much of the cash flow, so your after-tax cash-on-cash can exceed the pre-tax figure in early years. At sale, though, depreciation recapture (up to 25%), capital gains tax, and the 3.8% net investment income tax claw some of that back, lowering the after-tax IRR and equity multiple relative to their pre-tax versions. A 1031 exchange can defer that drag. Because taxes hit the exit hardest, they compress long-hold IRRs more than they compress a single year's cash-on-cash. Screen deals pre-tax, but run an after-tax projection before you commit real capital.
A practical workflow for using all three
Use the metrics in sequence rather than picking one. First, run cash-on-cash (and cap rate) on the back of an envelope to reject deals that obviously do not work — it takes 30 seconds and filters most listings. For the survivors, build a simple multi-year pro forma and compute ROI and the equity multiple to see the full-hold picture including appreciation and paydown. Finally, for the deals you are serious about — or when comparing options with different hold periods or capital timing — compute IRR to rank them on a time-weighted basis. No single number decides a purchase; the combination tells you whether a deal pays you well now, builds wealth over time, and uses your money efficiently given when the returns arrive.
MIRR: fixing IRR's reinvestment flaw
Standard IRR carries a hidden assumption that can flatter a deal: it presumes every interim cash flow is reinvested at the IRR itself. If a deal shows a 25% IRR, the math assumes you can redeploy each year's distributions at 25% too — rarely true. The modified internal rate of return (MIRR) fixes this by letting you specify a realistic reinvestment rate (say, a safe 4–5%) for interim cash flows and a separate financing rate for any negative flows. MIRR almost always comes in below the plain IRR, and it is the more honest number when a deal spins off a lot of interim cash you cannot reinvest at heroic rates. When you compare two deals with very different cash-flow timing, checking MIRR alongside IRR keeps a front-loaded deal from looking artificially better than a back-loaded one.
Annualized vs. cumulative ROI
'ROI' is ambiguous partly because people quote it two ways. Cumulative ROI is total profit ÷ invested capital over the entire hold — a 150% cumulative return over five years. Annualized ROI restates that as a per-year rate, but even here there are two methods: a simple average (150% ÷ 5 = 30%/year, which overstates because it ignores compounding) versus a compound annual growth rate (the fifth root of 2.5, about 20%/year, which is more honest). When someone quotes an ROI, always ask whether it is cumulative or annualized and, if annualized, whether it compounds. The gap between the naive and the compounded figure widens with the length of the hold, so long-term deals are where sloppy ROI math misleads the most.
Which metric different players use
Different actors in a deal lean on different numbers, and knowing which helps you speak their language. Individual buy-and-hold investors live on cash-on-cash and cap rate because they are quick and cash-focused. Lenders care about the debt-service coverage ratio and debt yield, not your equity return. Syndicators and private-equity sponsors quote IRR and equity multiple to limited partners, and their promote/carry is often tied to hitting an IRR hurdle. Institutional investors model IRR, equity multiple, and sometimes MIRR across long holds. If you are evaluating a syndication, expect an IRR-and-multiple pitch and press on the exit assumptions that drive it. If you are buying a small rental yourself, cash-on-cash and cap rate will carry most of the weight, with a simple IRR as a tiebreaker.
Holding period changes which metric wins
The length of your intended hold determines which metric matters most. For a short hold — a flip or a two-to-three-year value-add — appreciation and the exit dominate the return, so cash-on-cash is nearly irrelevant and IRR (with a realistic sale assumption) is the number that counts. For an indefinite buy-and-hold, current cash flow you will collect for decades matters far more, so cash-on-cash and total ROI carry the weight, and a precise IRR — which depends on a hypothetical future sale you may never make — becomes speculative. This is why the same deal can look attractive to a long-term landlord and unattractive to a short-term syndicator, or vice versa. Match the metric to your actual plan: quote cash-on-cash when income over a long hold is the point, and IRR when the return is driven by a defined entry and exit.
Frequently asked questions
Is cash-on-cash the same as ROI?
No. Cash-on-cash is a single-year pre-tax cash-flow yield on your invested cash; ROI usually captures total return over the hold, including appreciation and principal paydown, so it is a larger, multi-year figure.
Which metric is best?
None is best alone. Use cash-on-cash to screen quickly, ROI and the equity multiple to see the full-hold picture, and IRR to compare deals with different timelines on a time-weighted basis.
What is the difference between IRR and equity multiple?
IRR measures how fast your money grows (it is time-weighted), while the equity multiple measures how many times you got your money back (it ignores timing). A deal can have a high IRR but a low multiple, or vice versa, so investors watch both.
Why is my IRR so different from my ROI?
ROI averaged over several years ignores when cash flows arrive, while IRR discounts later dollars because they are worth less than earlier ones. When most of the return comes from a sale at the end of the hold, IRR is lower than a simple annualized ROI suggests.
Should these metrics be pre-tax or after-tax?
They are usually quoted pre-tax to keep deals comparable. But because depreciation shelters early cash flow and recapture plus capital gains tax hit the sale, run an after-tax version before making a final decision.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.