Cash-on-Cash Return – a percentage that measures the return on actual cash invested in an income-producing property otherwise known as the Equity Dividend Rate. It is one of the most widely used rates of return to measure an income property’s financial performance for the first year of ownership.
It is often used to evaluate the cash flow from income-producing assets. Generally considered a quick napkin test to determine if the asset qualifies for further review and analysis. Cash on Cash analyses are generally used by investors looking for properties where cash flow is king, however, some use it to determine if a property is underpriced, indicating instant equity in a property.
Many real estate investors base their investment decision on this return because it provides them with a “quick and easy way” to compare the overall profitability of multiple investments.
The cash-on-cash return is calculated by dividing the before-tax cash flow by the amount of cash invested (or down payment) and is expressed as a percentage.
The cash-on-cash return is only one of several very important return ratios that measure the profitability of an income-producing property.
For example when you purchase a rental property, you might put down only 20% for a cash down payment, plus some renovations. Cash-on-cash return would measure the annual return you made on the property in relation to the total cash investment.
Example
A single-family home costs $45,000 and needs $5,000 in repairs to be ready for a tenant to move in. The house will rent for $1,000 per month. Since it was a distressed property and had been vacant for 6 years, it will take 4 to 8 months to get the place ready and rented.
Repairs: $5,000 Total Cash Invested: $50,000 Annual Rent (6 Months): $6,000$6,000 ÷ $50,000 = 0.12 or 12% Cash-on-Cash |
Repairs: $5,000 Total Cash Invested: $50,000 Annual Rent (12 Months): $12,000$12,000 ÷ $50,000 = 0.24 or 24% Cash-on-Cash |
Now, take that same property and instead of buying it with cash we use an 80% hard-money loan (20% down) at 14.5% interest. The monthly mortgage payment would be around $450, leaving a monthly cash flow of about $650. Here’s what that would look like over a two year period:
Repairs: $5,000 Total Cash Invested: $14,000 Annual Cash Flow (6 Months): $3,900$3,900 ÷ $14,000 = 0.27 or 27% Cash-on-Cash |
Repairs: $5,000 Total Cash Invested: $14,000 Annual Cash Flow (12 Months): $7,800$7,800 ÷ $14,000 = 0.55 or 55% Cash-on-Cash |
As you can clearly see, by using financing there is a trade-off between the monthly cash flow and the cash-on-cash return. This also does not take into consideration the possibility of refinancing with a conventional bank for a much lower interest rate.
Note: The numbers demonstrated above are a hypothetical scenario for the sole purpose of explaining the concept of cash-on-cash returns. This information has been provided for general information purposes only and is not intended to be taken as investment or trading advice under any circumstances. Information and analysis above are derived from sources and utilizing methods believed to be reliable, but we cannot accept responsibility for any losses any person may incur as a result of this analysis. Individuals should consult with their personal financial advisers. By using this web site or any information contained in it, the user specifically and expressly agrees that no advisor-client relationship is created between said user and any author, owner, executive, or principal of this web site by either use of this web site, or by any information, product, or service offered by or on this web site. No express or implied guarantees or warranties as to investment or trading results are made, and any perceived insinuations of such are hereby expressly disclaimed.
