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It measures the annual rate of return that an investor receives in relation to the amount of cash they initially invested.
In simple terms, cash-on-cash return is the ratio of annual before-tax cash flow generated by a property to the total amount of cash initially invested in that property. This metric allows investors to understand how much income they can generate from their investment in relation to the cash they put in.
For example, if an investor purchases a property for $100,000 and puts $20,000 down as an initial investment, the cash-on-cash return would be calculated by dividing the annual cash flow generated by the property (say, $8,000) by the initial investment (in this case, $20,000). That would give a cash-on-cash return of 40%.
This means that for every dollar an investor puts into the property, they are receiving 40 cents in cash flow every year. The higher the cash-on-cash return, the more profitable the investment is for the investor.
Cash-on-cash return is particularly useful when analyzing the profitability of a property because it takes into account the actual amount of cash invested in the property, rather than just the property's overall value. This is important because it helps investors determine the amount of cash they need to invest upfront to make a profitable return on their investment.
While cash-on-cash return is a useful tool, it's important to remember that it doesn't take into account the appreciation of the property or any tax implications. It's just one of many metrics that investors should consider when analyzing a potential investment property.
In summary, cash-on-cash return is a key metric that real estate investors use to determine the profitability of a property investment. It measures the annual rate of return an investor receives in relation to the amount of cash they initially invested in a property, making it a useful tool for analyzing potential investments.
