Cash-on-Cash Return
Targeted question: What is Cash-on-Cash Return in real estate?
Short answer: Cash-on-Cash Return is the annual pre-tax cash flow divided by the total cash invested (down payment + closing costs + initial repairs). It measures the actual return on the investor’s out-of-pocket capital, unlike Cap Rate which ignores financing.
What is Cash-on-Cash Return in real estate?
Cash-on-Cash Return is the annual pre-tax cash flow divided by the total cash invested.
Formula: Cash-on-Cash = Annual Pre-Tax Cash Flow / Total Cash Invested.
Example: you put $100,000 down on a $400,000 rental and pay $5,000 in closing costs ($105,000 cash invested). After mortgage, taxes, insurance, HOA and management, you net $10,500/year in cash flow. Cash-on-Cash = $10,500 / $105,000 = 10.0%.
Cash-on-Cash includes the effect of leverage, which is why a property with a mediocre Cap Rate can still produce an attractive Cash-on-Cash Return when financed appropriately. Most buy-and-hold investors target 8%+ Cash-on-Cash.