What is Cash-on-Cash Return?

Q: What is Cash-on-Cash Return?

It's a metric that shows the annual pre-tax cash flow you get from an investment compared to the cash you initially put in. It helps you understand the direct income generated by your cash investment.

Q: Why is Cash-on-Cash Return important?

It helps investors evaluate the immediate income potential of an investment. It's useful for comparing different opportunities based on how much cash they return each year.

Q: How is Cash-on-Cash Return calculated?

You divide the annual pre-tax cash flow by the total cash invested. This gives you a percentage representing your return.

The Short Answer

Cash-on-Cash Return measures the annual pre-tax cash flow an investor receives from a property, relative to the amount of cash invested.

Cash-on-Cash Return explained simply

Cash-on-Cash Return is a simple way to look at how much money you get back each year compared to the cash you put into a deal. It focuses only on the actual cash flow and the cash you invested, ignoring things like debt or appreciation. It's a good metric for real estate investors to see the immediate return on their cash.

Real-World Example

The Apartment Building Investment

Let's say you buy an apartment building for $1,000,000. You put down $200,000 in cash and finance the rest. After all expenses (mortgage payments, taxes, insurance, maintenance), the property generates $20,000 in pre-tax cash flow each year.\n\nTo calculate the Cash-on-Cash Return:\n\n$20,000 (Annual Pre-Tax Cash Flow) / $200,000 (Cash Invested) = 0.10 or 10%\n\nSo, your Cash-on-Cash Return is 10%. This means for every dollar you invested, you get back ten cents in cash each year.

Why this matters

This metric is important because it shows you the direct income your cash investment is generating. It helps you compare different investment opportunities based on their immediate cash flow performance. It's especially useful for investors who prioritize annual income over long-term appreciation.

Luis MerchanBusiness

Cash-on-Cash Return is a quick way to see how much money an investment is putting in your pocket each year. It helps you compare different deals based on their immediate cash flow.