Cash-on-cash return is the cash a property puts in the owner's pocket in a year, divided by the cash he actually put into it. It measures the performance of the money invested rather than the performance of the building, so the loan, the down payment and the closing costs all move it.
Cash-on-cash=Annual cash flow before taxCash invested
- Annual cash flow before tax
- NOI less annual debt service, before income tax and before capital projects.
- Cash invested
- Down payment plus closing costs, loan fees and any capital spent to reach the stated income.
- It is a single-year snapshot. It says nothing about principal paid down, appreciation, or what the money does over a hold.
- It is loan-dependent by construction, so comparing two buildings by it is really comparing two financings.
- A high figure often means a small down payment, which is a different risk profile, not a better building.
- Ask what was counted as cash invested. Leaving out closing costs and initial capital is the most common way the number is flattered.
The same building bought at $1,599,500 with the $1,012,000 loan at 6.5% over 30 years. Closing costs are left out to keep the arithmetic visible.
The building earns 6.0% on its price and the equity earns 3.3%, because the loan costs more than the property yields. Leverage cuts both ways. The 3.3% is cash and only cash: $10,978 of that debt service retired principal, which the owner keeps and this line never shows. Counted, the equity returns 5.1%, which is the figure under leverage.
Related terms
All termsCash Flow
Cash flow is what actually lands in the owner's pocket in a period: net operating income minus the mortgage payment and minus the capital dollars the building consumed.
FinanceDSCR (Debt Service Coverage Ratio)
The debt service coverage ratio is net operating income divided by the annual loan payment.
InvestmentEquity Multiple
The equity multiple is every dollar returned to the investor divided by every dollar he put in, across the whole hold: operating cash flow plus what is left after the sale pays off the loan and its costs.
Terms arrive with the writing.
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