Cash on Cash Return is a crucial financial metric in commercial real estate, used to measure the return on the cash invested in a rental property. This metric helps investors evaluate the profitability of their investments based on the actual cash they have invested.
How to Calculate Cash on Cash Return
The formula is straightforward:
Cash on Cash Return = Annual Pre-Tax Cash Flow / Total Cash Invested
Breaking Down the Formula
1. Annual Pre-Tax Cash Flow
This is the rental income generated by the property after subtracting all operating expenses, mortgage payments, and any other costs. It represents the cash flow before accounting for taxes.
2. Total Cash Invested
This includes all the cash you’ve invested into the property, such as:
– Down payment
– Closing costs
– Renovation costs
– Any other out-of-pocket expenses related to the purchase of the investment property
Importance of Cash on Cash Return
Using this formula, you can determine the percentage return on your actual cash investment. This is particularly useful for commercial real estate investments involving financing or mortgages, as it allows investors to understand the return based on their out-of-pocket (cash) investment.
Why It Matters
This is an essential metric for commercial real estate investors because:
Financing Impact: It helps investors see the impact of financing on their returns, providing a clearer picture of profitability when loans are involved.
Investment Comparisons: It allows for better comparison between different investment opportunities, ensuring that investors can choose properties that offer the best return on their cash invested.
Strategic Planning: Understanding this metric aids in strategic planning and investment decision-making, helping investors optimize their portfolios for maximum returns.
By using Cash on Cash Return, commercial real estate investors can make more informed decisions, ensuring their investments are both profitable and strategically sound.
Written by LevRose CRE with assistance from:
LevRoseCRE.(2024) ChatGPT [Open AI]. https://chat.openai.com/
