What Is Cash On Cash Return? Infographic Mashvisor

Cover What is Cash on Cash Return? Formula, Example, Calculation (2035x1127)

Table of Contents

• What is Cash-on-Cash Return?
• How to Calculate Cash-on-Cash Return?
• Is High Cash-on-Cash Return Good?
• Why is Cash-on-Cash Return Important?
• What are the Limitations of Cash-on-Cash Return?

What is Cash-on-Cash Return?

Cash-on-Cash return is a metric used to evaluate the profitability of a real estate investment. It measures the annual return on investment (ROI) in relation to the amount of cash invested in the property. The cash invested does not include any financing costs, such as mortgage payments or interest, but only the actual amount of money that the investor puts into the property.

For example, if an investor buys a property for $100,000 in cash and earns $10,000 in net operating income (NOI) per year, the cash-on-cash return would be 10% ($10,000 / $100,000).

How to Calculate Cash-on-Cash Return?

To calculate cash-on-cash return, you need to know the amount of cash invested in the property and the annual net operating income (NOI) generated by the property. The formula is as follows:

Cash-on-Cash Return = Annual NOI / Total Cash Invested

For example, if an investor puts down $50,000 in cash to buy a property and earns $5,000 in NOI per year, the cash-on-cash return would be 10% ($5,000 / $50,000).

Is High Cash-on-Cash Return Good?

A high cash-on-cash return is generally considered good because it indicates that the investment is generating a high cash flow relative to the amount of cash invested. However, it's important to consider other factors such as the risks involved, the potential for appreciation, and the overall return on investment.

For example, a property with a cash-on-cash return of 20% may seem attractive, but if it's located in a high-risk area or has limited potential for appreciation, it may not be a good investment. On the other hand, a property with a lower cash-on-cash return but with strong potential for appreciation may be a better long-term investment.

Why is Cash-on-Cash Return Important?

Cash-on-cash return is important because it helps investors to evaluate the profitability of a real estate investment and to compare different investment opportunities. By calculating the cash-on-cash return for different properties, investors can determine which properties are likely to generate the highest returns on their investment.

Cash-on-cash return is also useful for evaluating the performance of existing investments. By tracking the cash-on-cash return over time, investors can determine whether their investment is performing well and whether they need to make any changes to improve their returns.

What are the Limitations of Cash-on-Cash Return?

While cash-on-cash return is a useful metric for evaluating the profitability of a real estate investment, it has some limitations that investors should be aware of.

First, cash-on-cash return does not take into account the potential for appreciation or depreciation in the value of the property. A property may have a high cash-on-cash return but may not appreciate in value over time, resulting in a lower overall return on investment.

Second, cash-on-cash return does not factor in any tax implications of owning the property. Taxes can significantly impact the profitability of a real estate investment and should be considered when evaluating the overall return on investment.

Conclusion

Cash-on-cash return is a useful metric for evaluating the profitability of a real estate investment, but it should not be the only factor considered. Investors should also consider other factors such as the risks involved, the potential for appreciation, and the overall return on investment. By taking a holistic approach to real estate investing, investors can make informed decisions and maximize their returns over the long-term.