Cash-on-cash return is a measure of the cash income generated by a real estate investment property compared to the cash invested. It is an important metric for real estate investors to consider when evaluating the potential profitability of a property. In this blog post, we will discuss the basics of cash-on-cash return and why it is an important factor to consider when evaluating the potential profitability of a real estate investment.
The cash-on-cash return is calculated by taking the annual cash flow of a property (the income generated by the property minus operating expenses) and dividing it by the total cash invested in the property. For example, if a property generates $10,000 in annual cash flow and the total cash invested in the property is $100,000, the cash-on-cash return would be 10%. This means that the property is generating a 10% return on the cash invested.
One of the main advantages of using cash-on-cash return as a metric is that it is a simple and straightforward measure of the property’s profitability. It is easy to understand and can be quickly calculated. Additionally, it is a measure of the return that is generated by the property based on the cash invested, which is an important consideration for investors who have limited cash to invest.
Another advantage of cash-on-cash return is that it can be used to compare different properties. For example, if you are considering investing in two properties, one with a cash-on-cash return of 8% and another with a cash-on-cash return of 12%, the property with the higher cash-on-cash return is likely to be more profitable. This can help investors make more informed decisions about which properties to invest in.
However, it is important to note that cash-on-cash return is only one factor to consider when evaluating the profitability of a real estate investment. Other factors such as the potential for appreciation, tax benefits, and the investor’s risk tolerance, should also be taken into account. Additionally, cash-on-cash return does not take into account any mortgage payments or other financing costs, so it may not provide an accurate picture of the property’s overall return on investment.
In conclusion, cash-on-cash return is an important metric for real estate investors to consider when evaluating the potential profitability of a property. It is a simple and straightforward measure of the property’s profitability based on the cash invested, and it can be used to compare different properties. However, it is important to keep in mind that cash-on-cash return is only one factor to consider when evaluating a real estate investment, and other factors such as appreciation potential and tax benefits should also be taken into account. By considering all of these factors, real estate investors can make more informed decisions about which properties to invest in and increase their chances of success.
