Cash-on-Cash Return is a metric used in real estate investing that calculates the cash income earned on the cash invested in a property. It's handy in scenarios where the investor uses borrowed funds or a mortgage to purchase the property because it considers the effect of financing on the investor's return.
It's calculated as follows:
Cash-on-Cash Return = (Annual Pre-Tax Cash Flow / Total Cash Invested) x 100%
- Annual Pre-Tax Cash Flow is the Net Operating Income (NOI) minus any debt service (mortgage payments). It's the cash flow generated by the property annually before taxes.
- Total Cash Invested is the total cash you've invested in the property. This typically includes the down payment, closing, rehab, and other upfront fees or expenses.
Let's consider an example:
Suppose you buy a property for $100,000. You put down 20% ($20,000) and take out a mortgage for the rest. Let's also say you spend another $5,000 on closing costs and initial repairs, bringing your total cash invested to $25,000.
Now, let's say the property generates $10,000 per year in rental income, and you have operating expenses of $3,000 per year. Your annual mortgage payments come to $3,600.
Your Annual Pre-Tax Cash Flow would be $10,000 (income) - $3,000 (expenses) - $3,600 (debt service) = $3,400.
Now, calculate the Cash-on-Cash Return:
Cash-on-Cash Return = ($3,400 / $25,000) x 100% = 13.6%
This means you're earning a 13.6% return on the actual cash invested in the property.
It's important to note that the Cash-on-Cash Return doesn't account for appreciation in the property's value or tax benefits such as depreciation. It's a simple, straightforward measure of the cash income an investment generates relative to the amount invested.
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