What is Cash-on-Cash Return?
Cash-on-Cash Return is a metric used to measure the performance of a real estate investment. However, it focuses on a comparison between the cash invested and pre-tax cash flow. It’s a great metric for investment properties that carry debt, as it helps investors understand the cash return they are receiving in relation to the cash they invested.
Calculate Cash-on-Cash return by dividing the annual pre-tax cash flow by the total cash invested.
For example, if an individual invests $100,000 into a real estate syndication and receives $6,000 in cash flow in the first year, then their Year 1 cash-on-cash return is 6%. However, if cash flow increases in Year 2 (whether by rental increases or lowered expenses), leading to the investor receiving $8,500 in pre-tax cash flow, then their Year 2 cash-on-cash return is 8.5%.
Projected cash-on-cash returns are valuable metrics when analyzing a syndication deal and GP’s underwriting. Ideally, you want to see your cash-on-cash return increase year over year. In most syndication deals, expect this metric to be low in the first couple of years but then increase significantly once the GPs have had time to execute their business plan.
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