What is Cash-on-Cash Return?

David Cohn

The cash-on-cash return is often considered one of the essential calculations in real estate investing. It determines the income earned on the cash investment made on a property.In simplest terms, this metric shows the annual return made by the investor on the property relative to the amount of mortgage they paid during the same year.It is relatively easy to compute for an understanding. Calculate on a pre-tax basis; the cash-on-cash return is a valuable forecasting tool for determining projected expenses and income targets.

The importance of cash-on-cash return

Cash-on-cash return analyses are often used for evaluating commercial investment real estate assets involving long-term debt borrowing. This real estate investment metric is widely used to measure a commercial property’s investment performance.It is also called “cash yield” on an investment property. When calculated correctly, it allows commercial real estate investors and business owners to more effectively analyze the business plan for a CRE property and the potential cash distributions over the investment’s life.

Is cash-on-cash return the same as ROI?

No. These two terms are often used interchangeably, but they are not the same.Return on investment or ROI takes into account the total returns on property investment. On the other hand, cash-on-cash return only measures the recoveries made from the actual cash invested. This is why many experts say that it is a more accurate analysis of property investment performance.

How do you calculate the cash-on-cash return?

This metric is calculated using the pre-tax cash inflows of the property and the pre-tax outflows that the property investor pays. It essentially divides the property’s net cash flow by the total cash that has been invested in it.To get the cash-on-cash return, divide the annual pre-tax cash flow by the total cash invested.​Annual pre-tax cash flow = (GSR + OI) – (V + OE + AMP)

  • GSR refers to gross scheduled rent
  • OI is another income
  • V is vacancy
  • OE means operating expenses
  • AMP means annual mortgage payments​

Here’s an example: Let’s say that you purchase a commercial property for $1,000,000 and pay $100,000 as a down payment, borrowing $900,000. You also pay $10,000 out of pocket for ancillary costs. The property does not produce income.You then decide to sell the commercial property for $1,100,000 after paying $25,000 in loan amortizations, including $5,000 in principal repayment.This means that your total cash outflow was $135,000 (that’s $100,000 + $10,000 + $25,000). Your cash inflow was $205,000 (that’s $1,100,000 minus $895,000). Using the formula, you will see that your cash-on-cash return is 51.85%.

What information about a property can you tell from its cash-on-cash return?

This metric essentially reveals the cash yield on an investment property. It measures the performance of the commercial real estate asset and gives investors and business owners a clear picture of how profitable it is.Aside from deriving the current return, this metric can also be utilized to predict a commercial property’s expected future cash distributions. Note that this is not a promised return; it is instead a target that can be used to evaluate potential investments.This is why property investors often use cash-on-cash returns to estimate what they might receive over commercial property investment.