What do we Understand by the term Cash on Cash Formula?

General
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Hey Comrades,

I’ve been reading about real estate investing and came across the term “cash on cash formula.” Can someone explain how the cash on cash formula works in real estate investment? What does it measure and how is it calculated? Are there any nuances or factors to consider when using this formula? Any practical examples or insights would be greatly appreciated to help me better understand its application.

Thanks in advance…

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The cash-on-cash return is a critical metric for real estate investors, measuring how efficiently cash invested generates returns.

How to Calculate Cash-on-Cash Return:

  1. Cash Invested: Include down payment, closing costs, and any repair or renovation expenses.
  2. Annual Cash Flow: Calculate as rental income minus operating expenses (e.g., property taxes, insurance, management fees).

Formula: Cash-on-Cash Return=Annual Cash FlowCash Invested\text{Cash-on-Cash Return} = \frac{\text{Annual Cash Flow}}{\text{Cash Invested}}Cash-on-Cash Return=Cash InvestedAnnual Cash Flow​

Example:

  • Property Details:
    • Purchase Price: $500,000
    • Down Payment: $100,000
    • Closing Costs: $10,000
    • Annual Rental Income: $60,000
    • Annual Operating Expenses: $20,000
  • Calculation:
    • Cash invested = $100,000 (down payment) + $10,000 (closing costs) = $110,000
    • Annual cash flow = $60,000 (rental income) - $20,000 (operating expenses) = $40,000
    • Cash-on-cash return = 40,000110,000\frac{40,000}{110,000}110,00040,000​ = 36.36%

Key Considerations:

  • Higher Returns: A higher cash-on-cash return indicates greater investment efficiency.
  • Other Metrics: Consider complementary metrics like cap rate, rental yield, and potential property appreciation.
  • Leverage: Using debt can amplify cash-on-cash return but entails increased risk.
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The total cash generated on the total cash (equity) invested in a deal is determined by the cash on cash return rate of return ratio.

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The formula is :

Cash-on-Cash Yield = Annual Net Cash Flow ÷ Invested Equity

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The cash-on-cash return measures a real estate investor’s annual pre-tax earnings relative to the initial amount spent to purchase a property. It’s expressed as a percentage. Here’s the formula:

Cash on Cash Return=Invested EquityAnnual Pre-Tax Cash Flow​