Cash on Cash return
Cash on Cash Return is a percentage that measures the return on cash invested in an income producing property. It is calculated by dividing before-tax cash flow by the amount of cash invested (down payment amount) and is expressed as a percentage. If before-tax cash flow for an investment property is equal to $15,000 and our cash invested in the property is $100,000, cash on cash return is equal to 15%. The Cash on Cash Return is used to evaluate the profitability of income producing properties. It is an important analysis tool when comparing multiple income properties. The investor should rank income properties based on their potential return on investment and the cash on cash return should be given a strong weighting. However, the cash on cash return calculation does have some limitations. It is a before tax calculation and doesn’t include the impact of an investor’s tax bracket on their returns. Also, it doesn’t consider the wealth building potential of a property via appreciation. A property in one area of a city may have a better cash on cash return then a property in another location, but it may not appreciate as fast because of it’s location. One location may be more desirable than the other. The investor should look at a property’s cash on cash return and the potential for appreciation when determining which income property to purchase.