Two of the most commonly cited return metrics in real estate investing are cash-on-cash return (CoC) and internal rate of return (IRR). Both measure investment performance, but they capture different aspects of return — and understanding the distinction helps investors compare deals more accurately.
Cash-on-cash return measures annual pre-tax cash flow as a percentage of total cash invested. It’s a simple, year-by-year metric. A property generating $12,000 per year in cash flow on a $150,000 equity investment has an 8% CoC return. This metric is useful for understanding the ongoing income yield of an investment, but it ignores the time value of money and the terminal value of the asset.
Why IRR Tells a More Complete Story
Internal rate of return calculates the annualized return across the entire investment period, accounting for both the timing of cash flows and the final sale proceeds. It is a more complete picture of total investment performance. An investment that generates modest early cash flows but a large profit at disposition might have a low CoC return but a compelling IRR.
Sophisticated investors use both metrics together. CoC tells you how well the investment will perform year-to-year; IRR tells you the all-in return story including the exit. At RIYT, we present both metrics in every investment summary, along with the assumptions underlying each projection, so investors can evaluate deals on their own terms.