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.

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