Cash on Cash Returns

Cash-on-Cash Return is a rate of return often used in real estate transactions that calculates the cash income earned on the cash invested in a property. It's one of the simplest and most effective real estate metrics for measuring the cash return on an investment property.

The formula to calculate Cash-on-Cash Return is:

Cash-on-Cash Return = Annual Pre-Tax Cash Flow / Total Cash Invested

Here's a more detailed explanation:

Annual Pre-Tax Cash Flow: This is the cash flow an investment property produces in a year after paying all expenses but before paying taxes. This could include rental income, fees, etc. For example, if a rental property generates $12,000 in a year (i.e., $1,000/month), and the total operating expenses for the year are $2,000, the annual pre-tax cash flow would be $10,000 ($12,000 - $2,000).

Total Cash Invested: This refers to the total cash that has been invested in the property. This could include the down payment, closing costs, renovation costs, or any other cash expense that was required to acquire and/or improve the property.

The Cash-on-Cash Return gives investors a more immediate understanding of their investment's performance. However, it does not account for appreciation, tax benefits, or principal paydown on any debt servicing. As such, it should be used in conjunction with other metrics when evaluating an investment's overall performance.