What Is a Cash on Cash Return and How Is It Calculated?

Cash on Cash Return is a financial metric used in real estate and investment analysis to evaluate an asset’s immediate cash-generating performance. It provides a straightforward way for investors to assess how much cash an investment generates relative to the actual cash invested. This metric focuses on the cash outlay and subsequent cash income, highlighting an investment’s liquidity.

Understanding Cash on Cash Return

Cash on Cash Return is a percentage comparing annual pre-tax cash flow from an income-generating property to the total cash initially invested. It is particularly useful for properties financed with debt, as it accounts for the impact of financing on the investor’s cash outlay. This metric is also known as cash yield.

Total cash invested includes all upfront contributions, such as the down payment, closing costs, and initial renovation or repair expenses. Annual pre-tax cash flow represents the gross rental income minus all operating expenses, including property taxes, insurance, maintenance, and vacancy allowances. It also subtracts annual debt service payments (principal and interest) on any loans, all calculated before income taxes.

How to Calculate Cash on Cash Return

The formula for Cash on Cash Return is: (Annual Pre-Tax Cash Flow / Total Cash Invested) x 100.

For example, an investor purchases a rental property with $150,000 total cash invested, including down payment and closing costs. The property generates $30,000 in gross rental income annually. After deducting $8,000 in operating expenses and $10,000 in annual mortgage payments, the pre-tax cash flow is $12,000. Using the formula, the Cash on Cash Return is ($12,000 / $150,000) x 100, resulting in 8%.

What Cash on Cash Return Reveals

The Cash on Cash Return percentage indicates the immediate performance of cash invested in a property. A higher percentage suggests a better immediate return on the cash outlay. This metric indicates an investment’s liquidity and short-term profitability, especially for leveraged investments.

This metric measures cash flow relative to cash invested, making it valuable for comparing immediate cash performance across investment opportunities. It does not account for property appreciation, future tax benefits, or changes in vacancy rates. Investors use Cash on Cash Return to assess if an investment meets their financial objectives or to compare the cash-generating efficiency of properties.