Cash-on-Cash Return for Landlords

The cash-on-cash return is another financial tool that you can use for evaluating the cash flow of an investment property. With investment property, cash flow certainly is king.

In addition, this analysis tool can also be used to determine if a property is under priced. Along with evaluating cash flow, the ability to determine if a property is under priced will allow you to certainly make better, more profitable investments.

So, let's see how cash on cash return is actually calculated and applied…

The Formula

In real estate investing, the cash on cash return is the ratio of annual before-tax cash flow divided by the total amount of cash invested, expressed as a percentage. The total amount of cash invested typically includes your down payment and all closing costs associated with purchasing the property.

Cash-on-Cash Return = (annual before-tax cash flow) / (total cash invested)

Example:

An investor purchases a four-unit apartment house for $350,000 with a $70,000 down payment. Closing costs are $2,000. Each month, the rental cash flow from the apartments, less expenses is $600. For the full year, the before-tax income would be $600 x 12 = $7,200. The cash on cash return would be…

$7,200 / ($70,000 + $2,000) = 0.10, or 10%

Limitations of Cash-on-Cash Return:

• Because the calculation is based entirely on before-tax cash flow relative to the amount of cash invested, it cannot take into account an individual investor's tax situation, which may influence the desirability of the investment.

• The formula does not take into account any appreciation or depreciation of the property.

• It does not account for other risks associated with the underlying property.

• It is essentially a simple interest calculation, and ignores the effect of compound interest. The implication for investors is that an investment with a lower nominal rate of compound interest may be superior, in the long run, to an investment with a higher cash on cash return.

For more information on using cash on cash return for investment properties, please visit The Landlord's Library book collection. It has all the in-depth information you'll need on the complete subject of residential landlording.

Return from Cash-on-Cash Return to Real Estate Cash Flow
and Financial Analysis