What Does ‘Cash On Cash Return’ Mean?

What Is Cash On Cash Return?

Cash on cash return is a metric used to gauge the financial performance of an investment. In its simplest terms, it is the return on investment (ROI) achieved after considering the cash flow generated from the initial capital investment. This makes it a great tool for any investor looking to make informed decisions when considering an investment. It can provide a more accurate picture than ROI alone because it is calculated using only cash values instead of the total value of the investment.

Calculating Cash on Cash Return

The calculation for cash on cash return is fairly straightforward. All you need are a few basic figures, such as the initial capital investment, the cash flow (or income) from the investment, and the time frame in which the investment was made. The formula itself is:

Cash on Cash Return = (Net Annual Cash Flow / Initial Investment) x 100

So, if an investor invested $100,000 into an investment that generated $10,000 per year in net cash flow, the cash on cash return would be 10%. This simple formula can help investors quickly and easily measure the performance of their investments.

Cash on Cash Return vs. ROI

The primary difference between cash on cash return and ROI lies in the fact that ROI is calculated using the value of the entire investment. This can be misleading because, over time, the value of an investment can change significantly due to changes in market conditions, inflation, etc. For example, if an investor purchased an apartment building for $100,000 and in five years it was worth $150,000, the ROI would be 50%, even though the investor only generated $10,000 in net cash flow over that five-year period. Cash on cash return, however, would be 10%.

In summary, cash on cash return provides a more accurate picture of the performance of an investment by taking into account only the cash values associated with an investment. It is an important metric for any investor to consider when evaluating an investment and making decisions about where to invest their money.