Loading the player...

What is 'Cash-On-Cash Return'

Cash-on-cash return is a rate of return often used in real estate transactions that calculates the cash income earned on the cash invested in a property. For example, when an investor purchases a rental property, she might put down only 10% for a cash down payment. Cash-on-cash return measures the annual return the investor made on the property in relation to the down payment only.

Cash-On-Cash Return

BREAKING DOWN 'Cash-On-Cash Return'

Cash-on-cash return is a metric normally used to measure commercial real estate investment performance. It is sometimes referred to as the cash yield on a property investment. The cash-on-cash return rate provides business owners and investors with an analysis into the business plan for a property and the potential cash distributions over the life of the investment.

Cash-on-cash return analysis is normally used for investment properties that involve long-term debt borrowing. When debt is included in a real estate transaction, as is the case with most commercial properties, the actual cash return of the investment differs from the standard return on investment (ROI). Calculations based on standard ROI take into account the total return of an investment. Cash-on-cash return, on the other hand, only measures the return on the actual cash invested, providing a more accurate analysis of the investment's performance.

Calculating the Cash-On-Cash Return

Cash-on-cash return only uses an investment property's pre-tax inflows received by the investor and the pre-tax outflows paid by the investor. For example, suppose a commercial real estate investor invests in a piece of property that does not produce monthly income. The total purchase price of the property is $1 million, and the investor puts $100,000 down and borrows $900,000. There are closing fees, insurance and maintenance costs of $10,000 the investor also pays out of pocket.

After one year, the investor has paid $25,000 in loan payments, of which $5,000 is principal repayment and the rest is interest. The investor then decides to sell the property for $1.1 million on the one-year date. This means the investor's total cash outflow is $135,000, and after the debt of $895,000 is repaid, he is left with a cash inflow of $205,000. The investor's cash-on-cash return is then: ($205,000 - $135,000) / $135,000 = 51.9%.

In addition to deriving the current return, the cash-on-cash return can also be used to forecast the expected future cash distributions of an investment. However, unlike a monthly coupon payment distribution, it is not a promised return but is instead a target used to assess a potential investment. In this way, the cash-on-cash return is an estimate of what an investor may receive over the life of the investment.

RELATED TERMS
  1. Cash-On-Cash Yield

    A basic calculation to estimate the return from an asset that ...
  2. Return

    The gain or loss of a security in a particular period. The return ...
  3. Investment Property

    A real estate property that has been purchased with the intention ...
  4. Cash Investment

    1. Short-term obligations, usually fewer than 90 days, that provide ...
  5. Rate Of Return

    The gain or loss on an investment over a specified period, expressed ...
  6. Total Return

    When measuring performance, the actual rate of return of an investment ...
Related Articles
  1. Investing

    What's a Cash-On-Cash Return?

    A cash-on-cash return reveals the cash return on a real estate investment.
  2. Investing

    7 Steps To A Hot Commercial Real Estate Deal

    For savvy real estate investors, times of lower prices reveal investment opportunity.
  3. Investing

    Flipping Houses: Is It Better Than Buy and Hold?

    Real estate investors can flip a property or use it for cash flow. Find out which will work in your neck of the woods.
  4. Investing

    How To Calculate ROI For Real Estate Investments

    Calculating return on real estate investments can be difficult. We help you figure it out.
  5. Managing Wealth

    Buying Your First Investment Property? Top 10 Tips

    Check this list if you are thinking of making a purchase and becoming a landlord.
  6. Investing

    Figuring What You Make On Rental Property (ROI)

    The return on investment can vary greatly, depending on how much of the building you own.
  7. Investing

    Use Real Estate To Put Off Tax Bills

    Find out how you can build wealth and reduce your taxes.
  8. Investing

    Simple Ways to Invest in Real Estate

    Owning property isn't always easy, but there are plenty of perks. Here are some ways to invest in real estate.
  9. Investing

    Why Real Estate Is a Risky Investment

    You should account for these hidden costs before investing in real estate.
RELATED FAQS
  1. What is the importance of the capitalization rate in real estate investing?

    Find out why an investment property's capitalization rate is important to real estate investors and how it can be used to ... Read Answer >>
  2. What criteria does a property need to meet to be considered an 'investment grade' ...

    Learn what it takes for institutional investors to consider a property "investment grade," such as real estate investment ... Read Answer >>
  3. What is the difference between a company's annual return and its annualized return?

    Understand the importance of calculating a company's annual return and its annualized return, and learn the differences between ... Read Answer >>
  4. How can I make equity investments in real estate?

    Invest in real estate equity through buying and selling real property or through other more liquid investments like real ... Read Answer >>
  5. What are the differences between investing in real estate and stocks?

    Invest in real estate by purchasing physical property or buildings, or invest in stocks by buying a claim to a company and ... Read Answer >>
  6. What are some of the limitations of only looking at the rate of return for an investment?

    Learn why only reviewing the rate of return for an investment poses a risk to the investor and what additional factors should ... Read Answer >>
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center