Retorno Cash-on-Cash vs IRR (TIR): Qué Revela y Qué Oculta Cada Métrica

Retorno sobre efectivo is the annual pre-tax cash flow from a property divided by the total cash you invested. It is a snapshot of one year, usually the first year.

Retorno sobre efectivo = annual pre-tax cash flow / total cash invested

Annual pre-tax cash flow is net operating income (NOI) minus annual debt service. Total cash invested is your down payment plus closing costs and any other cash you put in at purchase. It is not the purchase price. If you buy with a loan, your cash invested is much smaller than the price, which is exactly why leverage makes this number move so much.

Cash-on-cash is a good screening tool because it answers the question most new investors actually have: does this property pay me while I own it? If the number is negative, the property costs you money every month. It does not tell you what the property will be worth when you sell it, how much of the loan you will have paid down, or what happens in year three.

Run the numbers for any property with the cash-on-cash calculator.

IRR, the internal rate of return, is the discount rate that makes the net present value (NPV) of all the cash flows from an investment equal to zero. In plain language: it is the annualized rate of return that makes the money going in and the money coming out balance each other when you account for the time value of money. A dollar received in year five is worth less than a dollar received in year one, and IRR builds that into the answer.

Unlike cash-on-cash, IRR looks at the entire hold period: the yearly cash flow plus the money you get back when you sell, minus the loan balance still owed. That makes it the right tool for comparing deals with different hold periods and exit profiles. A property that pays little now but sells for much more can have a high IRR and a low cash-on-cash return. A property that pays well every year but never appreciates can have a solid cash-on-cash return and a modest IRR.

The trade-off is that IRR depends on assumptions about the future — the sale price, the rent growth, the holding period — and small changes in those assumptions move the answer a lot. You will see exactly how much in the example below.

To see the difference clearly, take one property and run it through both measures. Every number below is shown step by step.

The property: a 12-unit apartment building.

Purchase and financing

• Purchase price: $400,000
• Down payment (20%): $80,000
• Closing costs: $5,000
• Total cash invested: $80,000 + $5,000 = $85,000
• Loan: $400,000 − $80,000 = $320,000, at 6.5% fixed interest, amortized over 25 years
• Monthly mortgage payment: $2,160.66
• Annual debt service: $2,160.66 × 12 = $25,927.95 (call it $25,928)

Income and expenses (year one)

• Gross scheduled rent: $42,000 per year ($3,500 per month)
• Vacancy allowance, 5%: $42,000 × 0.05 = $2,100
• Other income (laundry, pet fees): $1,500
• Effective gross income: $42,000 − $2,100 + $1,500 = $41,400
• Operating expenses: $9,203 (property tax $3,400 + insurance $1,800 + maintenance $2,300 + management $1,703)
• Net operating income (NOI): $41,400 − $9,203 = $32,197

Retorno sobre efectivo

• Annual pre-tax cash flow: NOI − debt service = $32,197 − $25,928 = $6,269
• Retorno sobre efectivo: $6,269 / $85,000 = 7.38%

So in year one, this property pays about 7.38% a year on the cash you put in — and that is the whole cash-on-cash story. It says nothing about what happens next.

IRR: a five-year hold

Now hold the same property for five years and sell it. To keep the arithmetic transparent, assume the annual cash flow stays at $6,269 each year — no rent growth, no expense growth. That is a simplifying assumption, not a forecast.

• Sale price at the end of year 5: $460,000
• Selling costs, 6% (broker commission and closing costs): $460,000 × 0.06 = $27,600
• Net sale proceeds: $460,000 − $27,600 = $432,400
• Remaining loan balance after 60 monthly payments: $289,799
• Net cash received at sale: $432,400 − $289,799 = $142,601

Now lay out the cash flows:

The IRR is the discount rate that makes the present value of these inflows equal to the $85,000 outflow. That rate is about 17.0%. You can check it: discounting the five inflows at 17% gives a present value of roughly $85,100 — just above the $85,000 invested — so the true rate sits just above 17%.

Side by side

The IRR is much higher than the cash-on-cash return, and the reason is visible in the table: most of the money arrives in year 5, at the sale. The $142,601 from the sale is more than twenty times the annual cash flow, and it includes two things cash-on-cash never sees — the $60,000 of appreciation ($460,000 sale price versus $400,000 purchase price) and the $30,201 of loan principal paid down over five years ($320,000 borrowed minus $289,799 still owed). Cash-on-cash ignores all of that. IRR counts it.

Use cash-on-cash return when the question is about income: does this property pay me while I hold it, and how does its yearly income compare with another property's? It is the right first screen for a buy-and-hold investor, and the right check when you are deciding whether a property can carry its own mortgage. A property with a negative cash-on-cash return needs you to feed it cash every month, and you should know that before you buy it, not after.

Use IRR when the question is about the whole deal: what do I make overall, and when do I make it? It is the right tool for comparing two deals with different shapes — one that pays steadily for ten years against one that pays little for three years and then sells at a large gain — and for judging value-add deals, where most of the return comes from the exit. Lenders and partners also tend to think in IRR terms, so it is the number to have ready when you present a deal.

A practical rule: screen with cash-on-cash, underwrite with IRR. If a deal fails the cash-on-cash screen, you usually do not need the IRR to reject it. If it passes, run the IRR — and run it under more than one set of exit assumptions before you decide.

Cash-on-cash looks precise, but it is only as honest as the inputs behind it. Four traps show up again and again.

The vacancy trap. The example above assumes 5% vacancy. If the building actually runs at 10% vacancy, the math changes fast. Effective gross income falls to $42,000 × 0.90 + $1,500 = $39,300. NOI falls to $39,300 − $9,203 = $30,097. Cash flow falls to $30,097 − $25,928 = $4,169, and the cash-on-cash return drops from 7.38% to 4.90%. A five-point difference in one assumption cuts the headline return by a third. Always ask where the vacancy number came from and what the building's actual vacancy history is.

The reserves trap. NOI subtracts operating expenses, but it does not subtract money you should be setting aside for the roof, the HVAC system, or unit turnovers. If you reserve $200 a month — $2,400 a year — for future capital items, the real cash flow is $6,269 − $2,400 = $3,869, and the cash-on-cash return is 4.55%, not 7.38%. A property that looks cash-flow positive on paper can quietly consume its own return in capital spending. If the seller's numbers show no reserve allowance at all, treat the stated return with suspicion.

It ignores the exit. Cash-on-cash says nothing about appreciation, loan paydown, or what you will net at sale. A property can pay 8% a year and lose money overall if its value falls, and a property can pay 4% a year and make you rich if it appreciates. One year's number is not a verdict on the deal.

It ignores time and taxes. Cash-on-cash is a single-year, pre-tax figure. It does not account for rent growth, expense growth, or the tax effects of depreciation and interest deductions, all of which change the real return over a hold period. Use it as a snapshot, not as a forecast.

IRR is more complete, but it is also easier to manipulate — sometimes by accident, sometimes on purpose.

The exit price dominates the answer. In the example, about 86% of the total cash received arrives in year 5. So the IRR is mostly a bet on the sale price. Watch what happens when the exit price moves:

A $30,000 swing in the sale price — about 6.5% either way — moves the IRR by roughly four percentage points in each direction. If a deal's IRR looks exciting, ask what sale price it depends on and how that price was justified. An exit assumption is a forecast, and forecasts deserve scrutiny.

Rent growth compounds silently. The example assumed flat cash flow for five years. If the model instead assumes rents grow 3% a year, the cash flows and the exit price both rise, and the IRR climbs with them — but nothing in the IRR itself tells you that assumption was optimistic. Always read the growth assumption before trusting the IRR.

The reinvestment assumption. IRR math implicitly assumes that the cash you receive in years one through four gets reinvested at the same IRR — in this example, at 17%. In practice you will reinvest it at whatever your bank account, your next deal, or your money market fund pays, which is usually much less. That means a realized IRR is often lower than the projected IRR, especially on deals where the interim cash flows are large.

IRR says nothing about risk or dollars. A 17% IRR on $85,000 and a 12% IRR on $500,000 are not comparable as investments: the second one makes far more money in dollars. And IRR has no opinion about how risky the path was — a deal that depends on a single tenant renewing, a zoning change, or a hot market can show the same IRR as a boring, stable one. Always pair IRR with the dollar profit, the hold period, and the risks behind the assumptions.

Neither number is wrong. The mistake is using only one. A workable routine for a first deal:

1. Screen with cash-on-cash: does the property pay you in year one, under conservative vacancy and reserve assumptions? If not, move on.
2. Underwrite with IRR: build the five-year cash flows, pick a defensible exit price, and compute the IRR.
3. Stress the exit: rerun the IRR with a sale price 10% lower and vacancy 5 points higher. If the deal still works, it is genuinely robust. If it only works at the optimistic exit, the IRR is doing the selling, not the property.
4. Compare dollars, not just percentages: look at total profit and total cash invested alongside the rates.

The Deal Analyzer runs the full chain — NOI, cap rate, cash-on-cash, DSCR, and break-even — on one property, so you can check the screening numbers and the underwriting numbers in the same place instead of carrying figures between tools.