Cash-on-cash return is a ratio calculation that calculates the percentage of cash income earned on the cash invested in an investment. It is important to use income before taxes in this calculation because this calculation measures the amount of income relative to the cash invested in the property. Let’s look at a simple example, suppose you purchase a property for $100,000 and put 3.5% down, a.k.a. $3,500 down payment. Further suppose that the property requires $10,000 in upfront repairs. Your total cash invested in the property is currently $13,500. Now, suppose your annual pre-tax income is $1,685. The cash-on-cash return is calculated as (1685/13500) ~ 12.5%.
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