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Cash-on-cash return is a key metric used by real estate investors to evaluate the profitability of an investment property. It measures the annual return on the actual cash invested, providing insight into the investment’s efficiency and income-generating potential.
What is Cash-on-Cash Return?
Cash-on-cash return is calculated by dividing the property’s annual pre-tax cash flow by the total cash invested. This ratio helps investors understand how much cash income they are earning relative to their initial investment.
How to Calculate Cash-on-Cash Return
The formula for cash-on-cash return is:
Cash-on-Cash Return = (Annual Cash Flow / Total Cash Invested) x 100
For example, if an investor puts $50,000 into a property and receives $5,000 in annual cash flow, the cash-on-cash return is 10%.
Importance of Cash-on-Cash Return
This metric helps investors compare different properties and assess their income potential. A higher cash-on-cash return indicates a more profitable investment relative to the cash invested. It is especially useful for evaluating the short-term performance of rental properties.
Limitations of Cash-on-Cash Return
While useful, cash-on-cash return does not account for property appreciation, tax benefits, or financing costs. It focuses solely on cash income relative to cash invested, which may not provide a complete picture of an investment’s overall profitability.