Childcare Business ROI: What Return Can a Buyer Really Expect?

Two people can buy the exact same childcare centre and walk away with completely different returns. One buys the building and collects rent. The other buys the business and runs it. They are looking at the same address — and at two numbers that have almost nothing to do with each other. Confusing the two is the single most common mistake we see first-time buyers make.

If you are weighing up a purchase, the question is not “what does childcare return?” It is “which return am I actually buying, and what will my money earn once the debt and the risk are counted?” This article separates the two and shows how to work out the real childcare business ROI before you sign anything.

The two returns hiding inside one centre

A childcare centre can be sold as a property, as a business, or as both together. That structure decides which return you get.

Buy the freehold as a passive investor — the land and building, leased to an operator — and your return is a property yield. It behaves like commercial rent: relatively steady, contractually locked in, and priced against a capitalisation rate. In 2026, Ray White Commercial and CBRE Research put metropolitan childcare freehold at roughly 4.25%–5.25% and regional at around 5.25%–6.25%, with the strongest brand-and-lease combinations trading below 4.5%. That is a bond-like return, and it is deliberately low because the risk is low. (For how that number is built, see our guide to childcare cap rates in Australia — we won’t re-derive the formula here.)

Buy the leasehold business — the goodwill, the enrolments, the going concern, sitting on a lease you take over — and your return is an operating return. It is priced on a multiple of adjusted earnings, not a cap rate, and it is a completely different animal: higher on paper, and far more dependent on you.

What the operating return actually looks like

Leasehold childcare businesses in Australia typically change hands at around three to five times adjusted EBITDA, according to business brokers who specialise in the sector. Metropolitan centres with 80-plus licensed places and occupancy above 85% sit at the top of that band; smaller or regional centres sit closer to three times. Well-run centres generally report net margins in the 12%–20% range.

Take an illustrative centre. Say it earns $350,000 in adjusted EBITDA — that is earnings after a genuine market-rate manager’s salary has been counted as a cost — and you buy the leasehold business for four times that, or $1.4 million.

On an all-cash basis, $350,000 on a $1.4 million outlay is a 25% pre-tax operating return. Next to a 5% property yield, that looks extraordinary. But two things have to be true for it to hold: the earnings figure has to be real, and you have to keep the centre running at least as well as the vendor did. Neither is guaranteed, which is exactly why the market prices a business on a low single-digit multiple rather than a property-style 20-times figure.

One nuance decides whether the number is honest: whose salary is inside it. If the vendor was working in the centre unpaid and the “profit” assumes no manager, you are looking at a proprietor’s earnings figure (often called PEBITDA), not a true business return. Buy on that basis and you have quietly bought yourself a full-time job, not a passive $350,000. Strip in a market manager’s wage and the real, arms-length return is lower — and that is the number a careful buyer and their lender both work from. Getting the earnings base right is the whole game; our guide to EBITDA adjustments buyers must understand walks through what belongs in and out.

What leverage does to the number

Most buyers don’t pay cash. Banks will generally lend around 40%–50% of the price on a leasehold childcare business — less than on freehold, because there is no land as security — at commercial rates that in 2026 sit broadly in the 5%–8% range. (The full financing picture, including why freehold going concerns borrow more cheaply, is in our guide to financing a childcare centre purchase.)

Run the same illustrative centre with debt. Put in $700,000 of your own equity and borrow $700,000. Interest at, say, 7% costs roughly $49,000 a year. Your earnings of $350,000 less that interest leaves about $301,000 in pre-tax cash — now sitting on just $700,000 of your own money. That is a cash-on-cash return above 40%.

Leverage magnifies the return because childcare earnings comfortably clear the interest cost. But it magnifies the downside just as hard. If occupancy slips and earnings fall to $200,000, the interest bill doesn’t move — your cash return roughly halves. The property investor down the road, collecting contracted rent, barely feels the same wobble. Leverage is what makes an operating return exciting and what makes it fragile.

Why the big number isn’t as good as it looks

A 40% cash-on-cash return is not eight times better than a 5% property yield, and treating it that way is how buyers overpay. Three adjustments bring it back to earth.

First, you bought a job. Much of an owner-operator’s return is really payment for their own labour and licence responsibility. Deduct what you’d have to pay someone else to do it, and the “pure” return on capital shrinks.

Second, you bought operational risk. A property yield is protected by a lease. An operating return is exposed to occupancy, staffing, a wage cost that keeps rising, your National Quality Framework rating, and a new competitor opening two streets away. Those are real, and they move earnings quickly.

Third, you inherited a lease, not a title. On a leasehold deal the lease is the asset — and its weakest link. If there are only a few years of tenure left, or the rent already eats more than about 15% of revenue, the return can look healthy today and evaporate at the next review or renewal. Buyers and lenders both want to see roughly 10–15 years of secure tenure before they get comfortable.

Risk-adjust for all three and the honest comparison is not “5% versus 40%.” It is “a low, safe, passive yield versus a higher, working, riskier return.” Both can be good buys. They are simply different jobs for your money — a distinction we cover across our childcare property investment guide.

How to pressure-test the return before you offer

Before you fall in love with a headline multiple, run four checks.

Start with the earnings base. Is the profit built on a real manager’s salary, or on the vendor working for free? Are the add-backs genuine and repeatable, or wishful? Read the actual numbers, not the sales blurb — our guide to reading a childcare centre’s financial statements shows what to look for.

Then check the lease: years remaining plus options, the rent-to-revenue ratio, and the assignment and review terms. On a leasehold deal this is the return, not a footnote to it.

Next, look at the occupancy trend, not just today’s snapshot. A centre filling up and a centre quietly emptying can post the same profit this year and deliver very different returns next year.

Finally, pin the value before you model the return — you cannot judge a percentage without a reliable price to divide into. A quick way to sense-check where a centre sits before you commit to full due diligence is our free online estimator. From there, the full buying process is laid out in our step-by-step guide to how to buy a childcare centre.

Key Takeaway

A childcare centre offers two different returns — a low, safe property yield for the passive freehold investor, and a higher but working, riskier operating return for the leasehold business buyer. The operating return looks spectacular next to a cap rate, especially with leverage, but a large share of it is payment for your labour and for taking on real risk. Work out which return you are actually buying, strip a market salary out of the earnings, and risk-adjust before you decide it’s a bargain.

Thinking about buying a childcare centre and want to know what it will really return? Talk to ChildcareLink for a confidential, specialist read on the numbers. Visit childcarelink.com.au or contact our team directly.

Sources

• Ray White Commercial — childcare investment research (2026 yield bands, transaction turnover, yield compression)
• CBRE Research — “Child Care Centres” report, March 2026 (cap-rate range, institutional-capital context)
• Stonebridge Property Group and Burgess Rawson (via CBRE) — 2025 childcare transaction reviews (deal examples, turnover)
• Australian childcare-specialist business brokers (Miro Capital, Benchmark Business, New Chapter Business Sales) — EBITDA multiple bands, PEBITDA-vs-EBITDA distinction, net-margin range, rent-to-revenue and lease-tenure benchmarks
• Specialist commercial lenders and general Australian lending practice — leasehold loan-to-value ratios and loan terms

Disclaimer: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. ChildcareLink recommends seeking independent professional advice tailored to your specific circumstances before making any business or investment decisions.