Definition and Formula

In investing, the cash-on-cash return is the ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage. The formula to compute cash-on-cash return is:

Purpose

The cash-on-cash return is often used to evaluate the cash flow from income-producing assets.

Example

Suppose an investor purchases a $1,200,000 apartment complex with a $300,000 down payment. Each month, the cash flow from rentals, less expenses, is $5,000. Over the course of a year, the before-tax income would be $5,000 × 12 = $60,000, so the cash-on-cash return would be

.

Limitations

Because the calculation is based solely on before-tax cash flow relative to the amount of cash invested, it cannot take into account an individual investor's tax situation, the particulars of which may influence the desirability of the investment. Furthermore, the formula does not take into account any appreciation, depreciation, or other risks associated with the underlying property.

Cash-on-cash return is essentially a simple interest calculation, and therefore is not subject to the compounding of 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.