Cash-on-Cash Return
Definition:
Cash-on-cash return is a metric used to measure the annual return an investor earns on the actual cash invested in a property. It’s calculated by dividing the property’s annual pre-tax cash flow by the total cash invested, usually including the down payment and any out-of-pocket expenses. This metric is commonly used by real estate investors to assess the profitability of a property that is leveraged (purchased with financing).
🔍 Did You Know?
Unlike ROI, which considers the overall investment, cash-on-cash return focuses only on the cash portion of the investment, making it particularly useful for comparing properties where financing is involved.
Examples:
Example 1:
An investor buys a rental property with a $200,000 loan and a $50,000 down payment. The property generates $10,000 in annual pre-tax cash flow.
The cash-on-cash return is calculated as:
[($10,000 ÷ $50,000) x 100 = 20%]
This means the investor is earning a 20% return on the cash they invested.
Example 2:
You purchase a multi-family building with a total investment of $100,000 in cash (down payment and closing costs). The property brings in $15,000 in annual cash flow.
The cash-on-cash return would be:
[($15,000 ÷ $100,000) x 100 = 15%]
Why It’s Important:
Cash-on-cash return is a key metric for investors who finance real estate purchases, as it helps them understand how much profit they are making relative to the actual cash they've invested. It allows investors to compare different investment opportunities, especially when using leverage. A higher cash-on-cash return typically indicates a better investment, but it's also important to account for other factors like property appreciation and operating expenses.
Who Should Care:
- Real estate investors leveraging financing to maximize returns.
- Landlords looking to evaluate the performance of rental properties.
- Commercial real estate investors who want to assess the cash flow of multi-family or office buildings.
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