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This article explains the benefits of cash-on-cash return as a metric to understand the cash flow of a real estate investment opportunity. One of the benefits of investing in real estate compared to other investments, such as stocks, is that real estate cash flows in addition to any potential appreciation. Rental income, after deducting expenses associated with holding the property, is profit that hits the owner’s bottom line.

If you are a fractional property owner or a limited partner (LP) in a real estate deal, that profit gets distributed to you. One of the ways of gauging how much cash flow the property will generate based on the cash you put in is measured with the cash-on-cash-return metric.

What is Cash-on-Cash Return and How is it Calculated

Cash-on-cash return is a metric that measures the cash flow generated by a property relative to the cash invested. It is calculated by dividing the annual income generated by a property after deducting all of the operating expenses, including debt service (such as mortgage payments) and taxes, by the cash invested in the property.

If, for example, a property generates \$10,000 in annual cash flow after all expenses on the property, the cash-on-cash return would be 10% — his means that the investor is earning a 10% return on the cash invested in the property. So, in this case, cash-on-cash return: \$10,000 / \$100,000 (cash invested) = 10%

Typically, the cash-on-cash return is calculated annually, so in the scenario above, that 10% cash-on-cash return is based on the \$10,000 earned in a 12-month period, and the 10% would be an annual cash-on-cash return. One of the key benefits of owning real estate is cash flow, so this metric is crucial for any real estate investor.

Another advantage of using the cash-on-cash return metric is that it is easy to understand and calculate. It provides a clear and straightforward way to evaluate the cash flow generated by a property relative to the cash invested. Additionally, it helps investors quickly identify properties that yield the highest cash flow relative to the cash invested.