Cash-on-cash return is a metric used in real estate to calculate the percentage of cash earned on the cash invested in a property. It is determined by dividing the annual pre-tax cash flow by the total amount of cash invested. For example, if an investor purchases a property for $100,000, puts down $20,000, and generates $2,000 in pre-tax cash flow annually, the cash-on-cash return would be 10% ($2,000/$20,000).
This financial ratio is important because it provides a straightforward measure of immediate return. It allows investors to compare potential investment opportunities by analyzing the cash generated relative to the actual capital deployed. Historically, this calculation has been used as a primary indicator for income-producing properties, offering a quick assessment of profitability before factoring in potential appreciation or tax benefits. A higher ratio typically signifies a more attractive investment.
