| The cash-on-cash return (or equity dividend rate) is a | | | | purchased an apartment building for $1,000,000 and |
| percentage that measures the return on actual cash | | | | financed 80% of the purchase price; thus, the total |
| invested in an income-producing property. It is one of | | | | cash required to close the deal equates to $200,000. |
| the most widely used rates of return to measure an | | | | Cash-on-Cash Return Calculation: |
| income property's financial performance for the first | | | | Pre-Tax Cash Flow / Total Cash Invested = |
| year of ownership. | | | | Cash-on-Cash Return |
| Many real estate investors base their investment | | | | $25,000 / $200,000 = 12.5% Cash-on-Cash Return |
| decision on this return because it provides them with a | | | | Pre-Tax Cash Flow Calculation: |
| "quick and easy way" to compare the overall | | | | Gross Potential Income |
| profitability of multiple investments. In this article, we will | | | | Less: Physical Vacancy / Other Loss |
| take a closer look at this return metric and show | | | | = Effective Gross Income |
| exactly how it's calculated. Let's get started. | | | | Plus: Other Income |
| The cash-on-cash return is calculated by dividing the | | | | = Gross Operating Income |
| before-tax cash flow by the amount of cash invested | | | | Less: Operating Expenses |
| (or down payment) and is expressed as a percentage. | | | | = Net Operating Income |
| For example. If an investor purchased an apartment | | | | Less: Annual Debt Service |
| building that generated $25,000 in before-tax cash flow | | | | = Before-Tax Cash Flow |
| for the first year of ownership and their cash invested | | | | The cash-on-cash return is only one of several very |
| in the property totaled $200,000, cash-on-cash return is | | | | important return ratios that measure the profitability of |
| equal to 12.5%. This analysis assumes the investor | | | | an income-producing property. |