How to Calculate Cash on Cash Return?

Cash on cash return is a measure usually used to assess the effectiveness of a commercial real estate investment. This is sometimes called the monetary return on investment in property. The rate of return provides business owners and investors with an analysis of the business plan of the property and the possible distribution of cash throughout the investment period.

Determining the cash on cash return metric is especially important  because, unlike other real estate investing indicators, it includes debt services and your mortgage. You can calculate this metric by using our cash on cash return calculator.

What does cash on cash return mean?

Cash on cash return is a rate of return that is often used in property transactions, which calculates the cash income earned on cash invested in real estate. Simply put, a cash on cash return calculates the annual return that an investor has brought to the property relative to the amount of the mortgage paid during the same year. This is considered relatively easy to achieve and one of the most important calculations of return on real estate investments.

How to calculate cash on cash return?

Cash on cash return metrics are calculated using cash inflows from investing property before tax,  cash received by the investor, and payments by the investor before taxes. In essence, it divides the net cash flow by the total amount of cash invested.

Cash on cash return formula

The cash on cash return formula is as follows:

Cash on Cash Return = Annual Pre-Tax Cash Flow / Total Cash Invested

Total cash invested is the purchase price of the real estate plus closing costs and any capital costs, minus the outstanding mortgage balance.

Cash on cash return vs roi

Although they are often believed to be synonyms, cash on cash return and return on investment (ROI) are actually not the same when debt is used in real estate. Most businesses have debt, and the cash on cash return differs from the return on investment (ROI). Cash on cash return measures the total return on investment, including the cost of debt. On the other hand, the return on investment only calculates the profit made on the money actually invested, providing a more accurate analysis of the effectiveness of the initial investment.