The cash-on-cash is the ratio between the property's cash flow in a particular year (usually before taxes) and the amount of the initial capital investments. It is expressed as a percentage.
Although you can calculate the cash-on-cash return based on projections for any future year, investors tend to look at this measurement as it relates to the expected cash flow in the first year of ownership. Since this calculation doesn't take into account any time value of money, it probably does make sense to measure the cash flow that occurs soonest after you make the investment.
The cash-on-cash return is not a particularly powerful tool, but it has always been popular as a quick read on an income property, probably because it allows an easy comparison to other types of investments. For example, you can say - This property will give me a 6% cash return on my investment in the first year. If I invest in a mutual fund instead, I'll get only 3%.
You need to know about cash-on-cash return because sooner or later someone offering you a property is going to quote this statistic as if you should be impressed. Cash flow is a good thing, and if the property actually has it, fine. Just don't forget the other, better ways of taking the pulse of an income-property investment, as you can see in the other articles at Zilculator.com
How to Calculate Cash-on-Cash Return
- Find out or estimate Annual Cash Flow of the property.
- Divide this number by the Initial Cash Investment using the formula below:
Excel Spreadsheet Example
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