In one sentence
Annual pre-tax cash flow divided by the equity invested, a simple measure of current yield to an investor.
The longer version
Cash-on-cash return measures the annual cash an investment throws off relative to the cash put in, before any appreciation. It captures current income, not total return, which makes it easy to reason about.
It complements IRR and equity multiple: cash-on-cash speaks to income today, the others to total return over time.
Common questions
- How is cash-on-cash return calculated?
- Divide annual pre-tax cash flow after debt service by the equity invested. $80,000 of cash flow on $1,000,000 of equity is an 8 percent cash-on-cash return.
- What is the difference between cash-on-cash and cap rate?
- Cap rate is unlevered income relative to value. Cash-on-cash is levered cash flow relative to equity, so it reflects the effect of financing.
- Why does leverage affect cash-on-cash return?
- Because debt service reduces cash flow while debt reduces the equity required. Leverage can raise or lower cash-on-cash depending on the cost of debt.
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