Cash on cash return is a measure usually used to assess the effectiveness of a real estate investment, relative to the amount of upfront cash invested. The rate of return provides investors a tool to measure the potential success of a property investment.
Determining the cash on cash return metric is especially important because, unlike other real estate investing indicators, it includes carrying costs and estimated on-going expenses.
Cash on cash return is a rate of return that is often used in property transactions, which calculates the cash income earned on cash invested in real estate.
Cash on cash return metrics are calculated using cash inflows from investing property before tax, cash received by the investor, and payments by the investor before taxes. In essence, it divides the net cash flow by the total amount of cash invested.
The cash on cash return formula is as follows:
Cash on Cash Return = Annual Pre-Tax Cash Flow / Total Cash Invested
Total cash invested is the purchase price of the real estate plus closing costs and any capital costs, minus the outstanding mortgage balance.