Cash-on-cash return
Cash-on-cash return measures the annual pre-tax cash flow a property produces relative to the actual cash invested. Unlike cap rate, it accounts for financing, so it reflects the return on the money you put in.
The formula
Cash-on-cash return = annual pre-tax cash flow / total cash invested. If a property produces $8,000 of annual cash flow on $100,000 of cash invested, the cash-on-cash return is 8 percent.
How is cash-on-cash return different from cap rate?
Cap rate ignores financing: it is NOI divided by property value. Cash-on-cash measures cash flow after debt service against the cash actually invested, so leverage changes the result.
What is a good cash-on-cash return?
There is no universal number. It depends on the market, the leverage used, and the risk taken. It is most useful for comparing deals under consistent assumptions.
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