Cash on Cash Return
Real Estate Definitions for Real Estate Investing
Cash on Cash Return
Cash on Cash Return is one of the most important real estate financial return on investment (ROI) calculations. It is also probably the easiest to calculate and understand. The Cash on Cash Return helps you evaluate the long-term performance of a real estate investment. Cash on Cash Return is the property’s annual net cash flow divided by your net investment, expressed as a percentage.
Formula:
Cash on Cash Return =
A Property’s Annual Cash Flow
divided by
Down Payment (Investment)
EXAMPLE:
If the net cash flow from a property is $10,000, and the cash invested in the property is $100,000, then the Cash on Cash return is calculated to be 10% ($10,000 / $100,000). The net investment in property is the down payment which is generally the cost of the property less the amount borrowed.
A way to view this ratio is to compare it to a return of a certificate of deposit. If you were to purchase a certificate and the bank pays an interest rate of 2%, then the 2% is the Cash on Cash return on your investment.
Please note that the Cash on Cash Return does not include property appreciation or principal debt payments. Property appreciation is considered a paper gain or loss until it is realized in the year of sale. So therefore, if you are evaluating a property on a long-term basis, you need to focus more on the annual cash flow as it relates to your investment, and focus less on property appreciation.
Our real estate investment software calculates Cash on Cash Return so that you are in a better position of understating how much to offer for a particular property and make the appropriate presentations to bankers, lenders and prospective real estate partners.