Calculating Cash On Cash Return
Cash-on-cash return is a percentage that measures the return on actual cash invested in an income-producing property. It is one of the most widely used rates of return to measure an income property’s financial performance for the first year. The cash-on-cash return is calculated by dividing the pre-tax cash flow by the amount of cash invested (or down payment) and is expressed as a percentage. For example. If an investor purchased an commercial apartment building that generated $25,000 in before-tax cash flow for the first year of ownership and their cash invested in the property totaled $200,000, cash-on-cash return is equal to 12.5%. This analysis assumes the investor purchases an apartment property for $1,000,000 and finances 80%; thus, requiring 20% in equity or $200,000. Cash-on-Cash Return Calculation: Pre-Tax Cash Flow / Total Cash Invested = Cash-on-Cash Return $25,000 / $200,000 = 12.5% Cash-on-Cash Return The cash-on-cash return is only one of several very important return ratios that measure the profitability of an income-producing property. You will also want to take into account the Internal Rate of Return ( IRR ).
