Definition
Cash-on-cash return measures the annual pre-tax cash flow a property produces relative to the cash invested.
How It Works
It equals annual pre-tax cash flow divided by the total cash invested, including down payment and closing costs. Because it accounts for financing, it reflects the leveraged investor's actual cash yield rather than the property's unlevered return.
Example
An investor who puts $200,000 down and nets $20,000 of cash flow a year has a 10% cash-on-cash return.
When It Works Best
It is most useful for comparing the cash yield of leveraged real estate investments.
Who It Applies To
Real estate investors using financing.
Watch-Outs
It looks at one year of cash flow and ignores appreciation, principal paydown, and tax benefits, so it is one measure among several.
