What is Cash on Cash Return?
The Cash on Cash Return compares a real estate investment property’s annual pre-tax cash flow to the initial equity contribution.
- The cash-on-cash return is the ratio between the annual pre-tax cash flow and initial equity investment, expressed as a percentage.
- The cash-on-cash return is calculated by dividing annual pre-tax cash flow by invested equity, which provides practical insight into a real estate investor’s annual yield.
- The inclusion of financing costs differentiates the cash-on-cash return from the cap rate, which divides net operating income (NOI) by the market value of a property.
- The standard cash-on-cash return ranges from 8% to 12%, contingent on market conditions, economic sentiment, and investment firm-specific factors.
Table of Contents
- How to Calculate Cash on Cash Return
- Cash on Cash Return Formula
- Cash on Cash Return vs. Cap Rate: What is the Difference?
- Cash on Cash Return vs. ROI: What is the Difference?
- What is a Good Cash on Cash Return?
- Cash-on-Cash Return Calculator — Excel Template
- 1. Commercial Real Estate Property Assumptions
- 2. Net Operating Income Calculation (NOI)
- 3. Annual Pre-Tax Cash Flow Calculation
- 4. Cash-on-Cash Return Calculation Example
How to Calculate Cash on Cash Return
The cash on cash return, or “cash yield”, measures a real estate investor’s annual pre-tax earnings on a property relative to the initial amount spent to purchase the property itself.
The cash on cash return is calculated as the ratio between the annual pre-tax cash flow and invested equity:
- Annual Pre-Tax Cash Flow ➝ The annual pre-tax cash income expected to be generated on the property investment.
- Invested Equity ➝ The initial equity investment, i.e. the outlay of cash on the date of purchase.
In practice, the cash-on-cash return metric estimates the annual yield received by an investor on a specific property relative to the amount paid in the corresponding year, e.g. the mortgage payments.
Since the cash yield factors in costs like mortgage payments, the effects of financing costs are part of the implied return.
Cash on Cash Return Formula
The formula for calculating the cash-on-cash return involves taking the annual pre-tax cash flow and dividing it by the initial cash investment (i.e., the equity contribution).
While the annual cash flow is before taxes, the metric is calculated post-financing, so the annual cash flow is a “levered” metric.
The cash yield is expressed as a percentage, which makes comparisons across different property investment opportunities easier.
However, the context in which the investment was completed, such as the location, date, and real estate market conditions, must all be taken into account.
Common examples of expenses that are factored into the cash flow metric are the following:
- Property Taxes
- Maintenance Fees
- Property Upgrades
- Renovation Fees
- Closing Fees
- Insurance Premiums