Cash on Cash Return is a rate of return metric used in real estate investments that calculates the cash income earned on the cash invested in a property. It is expressed as a percentage and is calculated by dividing the annual pre-tax cash flow by the total cash invested.
Cash on Cash Formula: Annual Pre-Tax Cash Flow / Total Cash Invested
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Annual Pre-Tax Cash Flow is the income the property generates in a year after operating expenses, excluding financing costs.
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Total Cash Invested includes the down payment and any additional costs like closing costs.
For example, with a down payment of 20% and closing costs of 3% on a property priced at $129,000, and annual pre-tax cash flow of $45,384,
The Cash on Cash Return would be:
$45,384 / ($129,000 * 0.2 + $129,000 * 0.03) = 158.6%