Cash-on-Cash Return: Definition, Calculation & Importance

Cash on cash return is a rate of returnRate of ReturnThe Rate of Return (ROR) is the gain or loss of an investment over a period of time copmared to the initial cost of the investment expressed as a percentage. This guide teaches the most common formulas ratio that calculates the total cash earned on the total cash invested. The amount of the total cash earned is generally based on the annual pre-tax cash flow.

Cash on cash return is a simple financial metric that allows the assessment of cash flows from a company’s income-generating assets. The ratio is primarily used in commercial real estateReal EstateReal estate is real property that consists of land and improvements, which include buildings, fixtures, roads, structures, and utility systems. Property rights give a title of ownership to the land, improvements, and natural resources such as minerals, plants, animals, water, etc. transactions. In the real estate industry, the cash on cash return is sometimes referred to as the cash yield on a property investment.

The financial metric is particularly significant in the commercial real estate industry because of the nature of the transactions in the industry. In most cases, investments in properties are carried out using a large amount of debt. Therefore, the return on investment (ROI)Return on Investment (ROI)Return on Investment (ROI) is a performance measure used to evaluate the returns of an investment or compare efficiency of different investments. calculation loses its relevance because it accounts for all the money invested, including debt.

In contrast, cash on cash return excludes debtCurrent DebtOn a balance sheet, current debt is debts due to be paid within one year (12 months) or less. It is listed as a current liability and part of and evaluates only the actual cash amount invested. In such a scenario, an investor can obtain a more precise performance of his investment.

CFI’s Financial Analysis Fundamentals Course teaches you how to use ratios from the financial statements for financial analysis.

How to Calculate Cash on Cash Return

The cash on cash return is calculated in the following way:

However, because pre-tax cash flow is used in the calculation, an investor should always be aware of the tax treatment of his investment. If the cash on cash return is low, high taxes may erase any potential investment returns.

Practical Example

Suppose ABC Development decides to purchase a commercial space for $1 million. The company pays $200,000 in down payment and takes a mortgage of $800,000 from a bank. Besides the down payment, the company is required to pay $20,000 in various fees. ABC Development is going to lease the commercial space to various businesses.

After one year, the annual rental revenue from the property is $120,000. In addition, mortgage payments, including the principal repayment and the interest payments, are $30,000.

First, to calculate the cash on cash return, we need to determine the annual cash flow from the investment. The annual cash flow of ABC Development in the first year is:

Annual cash flow = Annual rent – Mortgage payments

Annual cash flow = $120,000 – $30,000 = $90,000

Then, we must find out the total cash invested. This is the amount that the company spent on the investment, excluding the leverage. Thus, the total cash invested is calculated by:

Total cash invested = Down payment + Fees

Total cash invested = $200,000 + $20,000 = $220,000

Using the information above, we can determine the cash on cash return in the first year:

Cash on cash return = $90,000 / $220,000 = 0.41 or 41%

Additional Resources

Thank you for reading CFI’s explanation of cash on cash return. CFI offers the Financial Modeling & Valuation Analyst (FMVA)®Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:

• Expected ReturnExpected ReturnThe expected return on an investment is the expected value of the probability distribution of possible returns it can provide to investors. The return on the investment is an unknown variable that has different values associated with different probabilities.
• Financial RatiosFinancial RatiosFinancial ratios are created with the use of numerical values taken from financial statements to gain meaningful information about a company
• Market to Book RatioMarket to Book RatioThe Market to Book Ratio, or Price to Book Ratio, is used to compare the current market value or price of a business to its book value of equity on the balance sheet.
• Investing: A Beginner’s GuideInvesting: A Beginner's GuideCFI's Investing for Beginners guide will teach you the basics of investing and how to get started. Learn about different strategies and techniques for trading