Cash on Cash Return

Cash on cash return is a popular financial metric used by real estate investors to evaluate the performance of income-producing properties. It measures the annual pre-tax cash flow generated by the property as a percentage of the initial cash investment, providing a clear picture of the efficiency of the investment in terms of cash utilization. Unlike other metrics such as cap rate or internal rate of return, the cash on cash return specifically focuses on the cash income generated by the property, making it particularly relevant for investors who rely on rental income to cover their expenses or pay off their mortgage.

 

 

To calculate the cash on cash return, the investor must first determine the annual pre-tax cash flow, which is the rental income generated by the property minus any operating expenses and mortgage payments. Next, the investor divides this cash flow by the initial cash investment, which includes the down payment, closing costs, and any initial repairs or improvements made to the property. The resulting percentage represents the cash on cash return, which can be used to compare the performance of different properties and investment strategies.

 

The cash on cash return is an essential tool for investors who use leverage or borrowed funds to finance their real estate investments. By focusing on the cash flow generated by the property, this metric helps investors evaluate the efficiency of their cash usage and the potential return on their investment. A high cash on cash return indicates that the property is generating a strong cash flow relative to the initial investment, while a low cash on cash return suggests that the property may not be producing enough income to justify the investment.

 

It is important to note, however, that the cash on cash return has its limitations. First, it does not account for property appreciation, which can be a significant component of a real estate investment's overall return. Additionally, the cash on cash return does not consider the time value of money or the impact of taxes on the investment's performance. As a result, investors should use this metric in conjunction with other financial metrics, such as cap rate, internal rate of return, and equity growth, to gain a comprehensive understanding of their investment's performance.