Cash-on-Cash Return Explained

There are many ways to measure the profitability of an investment property, but one of the most important for any investor is cash-on-cash return.

Let’s look at this deceptively simple metric, how it works, why it’s so important, and how you can start leveraging it to build greater profits in your real estate portfolio.

As the name implies, cash-on-cash return effectively measures an investor’s net income on a property divided by investment outflow.

What Is Cash-on-Cash Return?

First, it is one of a real estate investor’s primary tools in evaluating whether or not to invest in a property initially. Along with other important factors about the property itself and market conditions, an estimated cash yield can contribute to the overall valuation of a property.

Where Cash-on-Cash Return Is Most Helpful

As with practically any investment calculation, there are too many variables to lay down a hard-and-fast rule about what makes an ideal cash-on-cash return.

What is a Good Cash-on-Cash Return?

Markets and time will both play a significant role in a property’s cash yield, as will various factors of your specific investment setup, such as: – Whether or not you bought or sold the property during the year in question – Your out-of-pocket spending – Any reinvestment of income back into the property – How much risk the investment carries – The type and amount of leverage on the property, if any