01What is cash-on-cash return?

  • Cash-on-cash return is a financial measure used to determine the profitability of a real estate investment.
  • It calculates the annual return on the actual cash invested in a property.
  • The metric takes into account both the income generated and the cash invested by the investor.
  • This calculation helps investors evaluate the potential return on their investment compared to alternative opportunities.

02The formula for cash-on-cash return

  • The formula to calculate the cash-on-cash return is relatively straightforward:
  • Cash-on-Cash Return = Annual Cash Flow / Total Cash Invested * 100%
  • Let's break down each component of the formula:

03Annual Cash Flow

  • The first component of the formula is the annual cash flow.
  • This refers to the net operating income (NOI) generated by the property on an annual basis.
  • To calculate the annual cash flow, subtract the property's operating expenses from its gross rental income.
  • It is important to consider all expenses, including property management fees, maintenance costs, insurance, and taxes.

04Total Cash Invested

  • The second component of the formula is the total cash invested.
  • This includes the investor's initial down payment, closing costs, and any additional capital invested.
  • It is crucial to account for all cash invested in the property, as the cash-on-cash return is based on this figure.

05Calculation and Interpretation

  • Once you have determined the annual cash flow and the total cash invested, you can calculate the cash-on-cash return.
  • Divide the annual cash flow by the total cash invested, and then multiply by 100% to get the percentage.
  • For example, if the annual cash flow is $50,000 and the total cash invested is $500,000, the cash-on-cash return would be 10%.
  • A higher cash-on-cash return indicates a more profitable investment, while a lower percentage suggests lower returns.
  • It is important to compare the cash-on-cash return to other similar investment opportunities to assess its relative performance.

Conclusion

Calculating the cash-on-cash return is crucial for commercial real estate investors to determine the potential profitability of a property. By understanding the formula and its components, investors can make informed decisions and compare different investment opportunities. It is essential to consider other factors such as risks, market conditions, and future potential when evaluating the cash-on-cash return. Use this financial metric as a tool to assess the performance of your investments and guide your decision-making process.

MethodsDetails
Step 1Understand the concept of cash-on-cash return and its importance in evaluating real estate investments.
Step 2Use the formula: Cash-on-Cash Return = Annual Cash Flow / Total Cash Invested * 100%.
Step 3Calculate the annual cash flow by subtracting property expenses from gross rental income.
Step 4Determine the total cash invested, including the initial down payment and closing costs.
Step 5Divide the annual cash flow by the total cash invested and multiply by 100% to get the cash-on-cash return.
Step 6Interpret the cash-on-cash return and compare it to other investment opportunities to assess profitability.
cash-on-cash return
commercial real estate property
financial metric
investment profitability