Cash on cash return is a financial metric used to evaluate the return on investment (ROI) of a real estate investment. It represents the percentage of cash income generated by an investment property relative to the amount of cash invested in the property.
To calculate cash on cash return, you divide the annual pre-tax cash flow generated by the property (which is the net operating income minus the annual debt service) by the total cash invested in the property, including the down payment, closing costs, and any renovation costs. The resulting percentage represents the cash on cash return.
For example, if an investor puts down $100,000 to purchase a property and earns $10,000 per year in cash flow, the cash on cash return would be 10% ($10,000 divided by $100,000).
Cash on cash return is a useful metric for real estate investors because it allows them to compare the return on investment of different properties with varying levels of leverage. It is also helpful for determining whether a property will generate enough cash flow to cover debt service and provide a desirable return on investment.
