Cash on Cash Return is a percentage that measures the return on cash invested in an income producing property. It is calculated by dividing before-tax cash flow by the amount of cash invested and is expressed as a percentage. If before-tax cash flow for an investment property is equal to $15,000 and our cash invested in the property is $100,000, cash on cash return is equal to 15%.

The following shows how before-tax cash flow is derived.

 

Gross Income	$54,500
Less Vacancy Amount	$2,500
Gross Operating Income	$52,000
Less Operating Expenses	$17,000
Net Operating Income	$35,000
Less Annual Debt Service	$20,000
Before-Tax Cash Flow	$15,000

Cash on Cash Return is used to evaluate the profitability of income producing properties. It can be useful when comparing investment properties, but is just one of many analysis tools. It only considers before-tax cash flow and doesn’t take into account an investor’s individual income tax situation and it doesn’t consider the wealth building potential of a property via appreciation. A property in one area of a city may have a better Cash on Cash return then a property in another location, but it may not appreciate as fast because of it’s location. One location may be more desirable than the other.