Cash on Cash Return: Definition, Calculation, Formula, Example, Equation

Similar to ROI or return on investment, cash-on-cash return measures the percentage of cash flow that’s returned to the investor after accounting for all operating expenses.

CCR is a good metric to use when considering real estate investments because it focuses on the cash that’s being generated by the property, rather than simply its overall value.

Add your business to our business directory https://harbourfronts.com/directory/ Add your business. Also check out other businesses in the directory

In the real estate industry, cash-on-cash return is usually expressed as a percentage and can be a great way to compare different properties.

What is Cash on Cash Return

The cash-on-cash return measures the amount of money earned each year from the total sum invested. This figure is pre-tax and takes into account annual cash flow.

In simple words, the cash-on-cash return is what an investor earns on investment, taking into consideration the cash flow and not simply the overall value of the property.

CCR is similar to ROI but is a more accurate cash flow metric. It’s mostly used in commercial real estate and by experienced investors. It can also be used as an addition to ROI because it’s a good indicator of what an investment will return in cash.

How to Calculate Cash on Cash Return

Calculating CCR is straightforward. There are mainly two elements that go into it: Annual pre-tax cash flow and Total cash invested.

The annual cash flow is calculated by

Annual rent – Mortgage payments

The formula is

CCR = Annual pre-tax cash flow / Total cash invested

Where

Annual pre-tax cash flow: This is the amount of money you bring in each year from the property after expenses, but before taxes.

Total cash invested: This is the total amount of your own money that you put into the deal. It includes the down payment, closing costs, and any rehab or renovations that need to be done.

Examples

Let’s say you’re looking at a duplex that you plan to buy for $200,000. You put down $40,000 and finance the rest. The property is expected to generate $24,000 in annual rent. Your total cash investment would be $40,000 + closing costs + any renovations necessary.

After one year the annual pre-tax cash flow would be $24,000 – $14,400 (12 months x $1,200 monthly mortgage payment). This gives you a cash-on-cash return of

$24,000 – $14,400/$40,000 = 0.60 or 60%.

This means that for every dollar you put in, you’re getting 60 cents back in cash flow.

To compare, if the property went up 10% in value after one year, your return on investment would be

($22,000/$200,000) x 100% = 11%.

While an ROI of 11% is great, it’s not as good as a CCR of 60%.

This is because the CCR takes into account the cash that you have in hand, while the ROI only considers the increase in value of the property.

Conclusion

Cash-on-cash return is a helpful metric for real estate investors because it measures the actual cash flow of an investment, rather than just its overall value. It can be a good complement to ROI because it helps you see what an investment will return in cash.

Further questions

What's your question? Ask it in the discussion forum

Have an answer to the questions below? Post it here or in the forum

LATEST NEWSSudan army calls on ex-soldiers to re-enlist, sporadic fighting persists
Sudan army calls on ex-soldiers to re-enlist, sporadic fighting persists
Stay up-to-date with the latest news - click here
LATEST NEWS'It shouldn’t matter how tall you are or how much you weigh': New York City bans height and weight discrimination
'It shouldn’t matter how tall you are or how much you weigh': New York City bans height and weight discrimination

Exemptions under the ordinance include cases in which a person's height or weight could prevent them from performing essential job functions.

Stay up-to-date with the latest news - click here
LATEST NEWSLegible Enters Audiobook Market With Thousands of Audiobooks and Announces $540,000 Unit Offering Private Placement
Legible Enters Audiobook Market With Thousands of Audiobooks and Announces $540,000 Unit Offering Private Placement

VANCOUVER, British Columbia — Legible Inc. (CSE: READ) (OTCQB: LEBGF) (FSE: D0T) (“Legible” or the “Company”) is excited to announce that, in advance of the upcoming release of the Legible Wander app for offline reading, Legible will begin onboarding audiobooks from its existing network of…

Stay up-to-date with the latest news - click here
LATEST NEWSDigital Currency Group to shutter institutional trading unit TradeBlock
Digital Currency Group to shutter institutional trading unit TradeBlock
Stay up-to-date with the latest news - click here
LATEST NEWSIn the land of ETFs, the chipmakers are king after a record $805 million influx the day that Nvidia kicked A.I. hype into the stratosphere
In the land of ETFs, the chipmakers are king after a record $805 million influx the day that Nvidia kicked A.I. hype into the stratosphere

The iShares Semiconductor exchange-traded fund saw the biggest influx for one session going back to at least 2001, data compiled by Bloomberg show.

Stay up-to-date with the latest news - click here

Leave a Reply