Cash-On-Cash Return

Imagine if Johnny Cash narrated a film in which he reflected on his life. Cash on Cash would be a good title. But imagine if he came back from the dead to tell America a few things he left out of the first film. Cash on Cash Return would make for a proper sequel title.

Too bad that real estate experts have already claimed “Cash on Cash Return” for themselves. This ratio represents a practical way to measure return on investment in prospective real estate projects. In the hyper-sexy world of building and house slinging, investors take initial cash flow and divide it by the equity invested at the end of a specific period. The quotient is the Cash on Cash Return.

Example:

Let’s imagine a commercial property will produce a before-tax cash flow of $100,000 by the year 2022. Then let’s say that the people who want to own the building will have injected about $1 million in the project by the end of that year.

We’ll divide the pre-tax cash flow of $100,000 into the $1 million of equity invested. This will give us a cash-on-cash return of 10% for the year 2022.

It’s not as entertaining as listening to Johnny Cash talk about his drug-addled years, but at least you can now decide if a real estate property surpasses an expected minimum annual return you’d acquire when examining real estate opportunities.