Cash-On-Cash Return

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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.