Darrell Roberts is the founder of Apartment Analytics Software, LLC, one of the real estate industry’s leading apartment investment software firms. Investors can learn more by visiting www.ApartmentAnalyticsSoftware.com. Darrell Roberts Apartment Analytics Software, LLC Ph: (800) 853-7255 Email: info@ApartmentAnalyticsSoftware.com Web: www.ApartmentAnalyticsSoftware.com
The cash-on-cash return (or equity dividend rate) is a percentage that measures the return on actual cash invested in an income-producing property. It is one of the most widely used rates of return to measure an income property’s financial performance for the first year of ownership.
Many real estate investors base their investment decision on this return because it provides them with a “quick and easy way” to compare the overall profitability of multiple investments. In this article, we will take a closer look at this return metric and show exactly how it’s calculated. Let’s get started.
The cash-on-cash return is calculated by dividing the before-tax cash flow by the amount of cash invested (or down payment) and is expressed as a percentage.
For example. If an investor purchased an apartment building that generated $25,000 in before-tax cash flow for the first year of ownership and their cash invested in the property totaled $200,000, cash-on-cash return is equal to 12.5%. This analysis assumes the investor purchases an apartment property for $1,000,000 and finances 80%; thus, requiring 20% in equity or $200,000.
Cash-on-Cash Return Calculation:
Pre-Tax Cash Flow / Total Cash Invested = Cash-on-Cash Return
$25,000 / $200,000 = 12.5% Cash-on-Cash Return
Pre-Tax Cash Flow Calculation:
Gross Potential Income
Less: Physical Vacancy / Other Loss
= Effective Gross Income
Plus: Other Income
= Gross Operating Income
Less: Operating Expenses
= Net Operating Income
Less: Annual Debt Service
= Before-Tax Cash Flow
The cash-on-cash return is only one of several very important return ratios that measure the profitability of an income-producing property. In addition to looking at the cash-on-cash return, investors should also calculate other key performance ratios such as the internal rate of return (IRR) and modified internal rate of return (MIRR).
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