What is Cash on Cash Return?
The cash-on-cash return metric is a calculation of the amount of income an investor earns on an apartment property in comparison to the amount of cash invested. Cash on cash return is sometimes referred to as the equity dividend rate, and this calculation is used as a standard for assessing a possible apartment property investment. Generally speaking, when it comes to the cash on cash return metric, the figure is most impacted by the leverage of a given transaction, since leverage dictates the amount of upfront cash an investor is required to put down in order to enter into a commercial real estate investment (higher leverage meaning the investor can buy more with less money).
Calculating Cash on Cash Return
In order to calculate the cash on cash return, an investor must first determine the net income of the target property for the year. The net income can be determined by taking the gross income that the property generated and then subtracting any operating costs (and in the event the building was financed with an apartment loan, debt service as well). Then, the net income should be divided by the total cash amount spent on the property. The resulting figure is then converted to a percentage representing the cash on cash return.
The cash on cash return metric can vary greatly for the same apartment property depending on the financial aspects of how that property was acquired. For example, if an investor spends $3 million buying a piece of property, their cash on cash return will be far lower than if they borrow $2.5 million and only spend their cash on a $500,000 down payment and closing costs.
Cash on cash return can be calculated by using the following formula:
Cash on Cash Return= Annual Dollar Income / Total Dollars Invested