Cash-on-cash return is a financial metric commonly used in the real estate investment industry to measure the return on investment (ROI) directly received from an investment property. It is calculated by dividing the annual pre-tax cash flow by the total cash invested. This metric helps investors to evaluate the business performance and cash income on the capital invested, rather than the overall return including estimated changes in the value of the investment property.
It can be mathematically represented as:
Cash-on-Cash Return = (Annual Pre-tax Cash Flow / Total Cash Invested) * 100%
The annual pre-tax cash flow is the net income from the property (rental income, for example) after all expenses (maintenance, property management, taxes, insurance, etc.) but before taxes. The total cash invested includes the initial cash investment, such as down payment, closing costs, rehabilitation costs, and any other out-of-pocket expenses related to the purchase of the property.
It’s important to note that the cash-on-cash return does not account for appreciation/depreciation, mortgage paydown, or tax benefits. It purely focuses on the annual return the investor makes in relation to the amount of cash they initially invested.