a ratio used to show cash returns on the original cash invested.
How Cash-on-Cash Return Works
Cash-on-cash returns, CCR, are often used in real estate trading that show the cash income earned from the original cash invested in the property through a mortgage, renovation works, etc. You can work out cash-on-cash return using the following formula:
(Pre-tax Cash Flow ÷ Total Invested Cash) x 100 = Cash-on-Cash Return
The figure that comes out of this formula is written as a percentage; this is your cash-on-cash return. A "good" cash-on-cash return is based on the investor's perspective and how they interpret the figures. Many people think 8% is a good return, whereas others don't invest unless they see a return of at least 20%.
An Example of Cash-on-Cash Return
Let's say you invest in an estate. You purchase a run-down apartment in London for $400,000 (with an extra $1,500 spent on fees) with cash and then go on to make renovations to the property worth $5,000, bringing your total spending to $406,500. You charge tenants $3,500 per month or $42,000 per year and then pay out 1/3 in bills and other operating costs. You need the cash flow to work out the cash-on-cash return, which is 2/3 x $42,000 = $28,000. Therefore your CCR = ($28,000 ÷ $406,500) x 100 = 6.8%.
More realistically, you may take out a loan to buy a property. Again, we'll say the price is $400,000, so the total investment comes to $406,500. We are now paying 4% interest as well as running costs, meaning we now have to pay $16,260 in repayments so the cash flow is $28,000 - $16,260 = $11,740. This means that the CCR is now ($11,740 ÷ $406,500) x 100 = 2.8%, a great reduction in return.
If you're looking for what to expect, you should play with some numbers to find a percentage you're happy with; substitute numbers in one of our examples to suit your situation.
Return on Investment vs. Cash-on-Cash Return
As mentioned, cash-on-cash return is most commonly used in the real estate trade; however, you can see the return on investment used in many other investment types. You need to know the amount you've earned and the amount you've invested in using the return on investment calculation. As you wouldn't necessarily know the exact earnings, it would be nearly impossible to use this calculation for real estate, making cash-on-cash return the clear choice for investors in real estate.
You should note that cash-on-cash return doesn't take all investments and outgoings into account and is only a rough estimate regarding your return. Completing a cash-on-cash return is a preliminary check; therefore, you should look into your investments in more depth before "leaping." Besides this, the cash-on-cash return has a significant impact on investors' decisions. It is an excellent indicator as to whether an investment is sound or not, and so it is clear to see that cash-on-cash return is one of the cornerstones of real estate investment.