Cash on Cash Return

Cash on cash return is annual pre-tax cash flow divided by the cash invested in the deal. Cash flow is net operating income less debt service, so the metric sits one step downstream of NOI and, unlike cap rate, changes with the loan. Two buyers of the same NOI can have very different cash on cash returns.

On the default property with 25% down, cash invested is $75,000 plus closing costs. NOI of $18,270 less debt service of $18,420 leaves cash flow of about negative $150, a cash on cash return just under zero. A cash buyer earns the full $18,270 on $300,000, a 6.09% return that equals the cap rate. The loan turned a 6.09% property into a break-even deal because the mortgage constant, about 8.2%, exceeds the cap rate.

The Wikipedia article notes that cash on cash ignores appreciation, principal paydown and tax effects, and measures only the first year. Its usefulness depends entirely on the NOI underneath. A listing that shows a 9% cash on cash return by leaving vacancy, management and reserves out of NOI is describing a property that does not exist.

Further reading: Cash on Cash Return on Wikipedia.