Calculating Interest 6: Cash-on-Cash

Cash-on-cash return is a simple gauge that is mostly used by real estate investors. It calculates the cash flow in the first year of a property. Here is the formula: Cash-on-Cash = First Year’s Cash Flow / Cash Invested.

For example, you buy a $100K property with only $24K out of pocket. And you are able to cash flow $200 a month for a total of $2,400 for the first year. Your cash-on-cash return is 10%. $2,400 / $24K = 10%.

However, cash-on-cash isn’t calculating your overall return. It’s only looking at the money you put in compared to the money you got back in the first year.

If your property also appreciated by 3%, and it grows to $103K after the first year, your total return would be 22.5%. ($3,000 + $2,400) / $24K = 22.5%. And it would even be a little higher than that if you also counted the equity you gained by your renter paying off your mortgage.

So cash-on-cash isn’t the full picture, but it gives you a quick idea for how good the cash flow is. Usually properties that have more cash flow are in areas that have less appreciation, and vice versa.

What do you think?
Joseph

This is a series. Here is the previous post. Here is the next post.