Cash on Cash Return

Cash on Cash Return is probably the most important ratio you need to focus on when evaluating the long-term performance of a property investment. Cash on Cash Return is the property's annual net cash flow divided by your net investment, expressed as a percentage.

EXAMPLE:

If the net cash flow from a property is $10,000, and the cash invested in the property is $100,000, then the Cash on Cash return is calculated to be 10% ($10,000/$100,000).  The net investment in property is the cost of the property less the amount you borrowed.

A way to view this ratio is to compare it to a return of a certificate of deposit.  You deposit money in the bank and the bank pays you an annual return, say 5%.  The 5% is the Cash on Cash ratio. 

Please note that the Cash on Cash return does not include property appreciation which is a non-cash flow item until the year of sale.  So therefore, if you are evaluating a property on a long-term basis, you need to focus more on the annual cash flow as it relates to your investment, and focus less on property appreciation.