Cash-on-cash return is a popular return used by real estate investors for real estate investment analysis because it offers a “quick read” about the property’s profitability.

Cash-on-cash return (expressed as a percentage) measures the ratio between the anticipated first-year cash flow of a rental property to the amount of investment initially made to purchase the rental property.

Because cash on cash doesn’t take into account time value of money, it’s best to restrict the cash-on-cash return as a measurement to an income property’s first year cash flow, not its future year’s cash flows. Moreover, cash on cash return by itself should not be used to decide whether a property is fit to buy.

How to Use Cash on Cash Return

1. It can help the investor gauge the profitability an income property against another investment opportunity.

2. It can help the investor compare similar other income properties.

How to Calculate Cash on Cash Return

Cash on Cash Return = Cash Flow / Initial Investment

Note: Cash Flow is the amount of income less expenses and debt service. Initial Investment is the amount of cash the investor is required to invest to purchase the property (i.e., down payment, loan points, escrow and title fees, appraisal, and inspection costs).

For Example: A real estate investor makes an initial cash investment of $206,050 for a rental property estimated to produce a cash flow of $21,483. What is the investor’s cash on cash return? $21,483 / 206,050 = 10.43% Cash-on-Cash Return

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