CandleFocus

Cash-on-Cash Return

Candlefocus Editor
Cash-on-cash return, sometimes referred to as cash return on investment (CROI), is a critical metric used to analyze the profitability of a real estate investment. It measures the amount of cash flow a real estate investor earns from their investment over a given period (typically one year) relative to the amount of cash invested in the property. This metric is calculated on a pre-tax basis, meaning rent income is reported as is and mortgage payments are accounted for as expenses.

Given its primary focus on cash flow, cash-on-cash return is one of the most important metrics used to evaluate real estate investments. By understanding a particular property’s cash-on-cash return, an investor can determine how much cash flow the property generates each year and how much cash is available to reinvest in new investments or make additional investments.

In addition to its use in analyzing the performance of an individual property, cash-on-cash return can also be used to compare the potential returns of different investment opportunities. For example, if an investor is looking at two properties with different purchase prices and rental rates, they can measure the cash-on-cash return of each to see which one will generate the higher return.

Cash-on-cash return can also be used to set a targeted return for a real estate investment. By analyzing historical cash-on-cash return for the property, an investor can set a realistic target for the cash flow they would like to achieve over the course of their investment.

Finally, cash-on-cash return is highly important in the assessment of leverage. Leverage refers to how much debt an investor uses to finance their real estate investments. By utilizing leverage, an investor can increase their return on the money they invest in a property, as the increased cash flow generated by financing will increase the total return on the investment. As such, by calculating the cash-on-cash return of a leveraged investment, an investor can determine the effects of financing and the cost of utilizing leverage.

In conclusion, cash-on-cash return is an important metric for assessing the performance of a real estate investment and comparing the potential return of different opportunities. By understanding cash-on-cash return, an investor can accurately gauge the amount of cash flow generated by the property and determine the return achieved on the amount invested. Moreover, it can be used to set a target for projected earnings and to analyze the effects of leverage.

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