Cash-on-Cash Return

Cash-on-cash return is the cash an investment pays out in a year divided by the cash you put into it. Invest $1,000 and receive $65 in distributions over twelve months, and the cash-on-cash return is 6.5%. It looks at cash only. It ignores the property's change in value, any equity built by paying down a mortgage, and tax effects. That makes it a narrower figure than IRR, and a more honest one for the question most investors actually ask, which is how much lands in the account each year.

Cap rate measures the property with no debt: net operating income divided by the full price. Cash-on-cash measures your position, which may involve debt. If the property is bought with a mortgage, the investors put in less cash, the loan payments come out of the income, and the cash-on-cash return can end up higher or lower than the cap rate depending on whether the loan costs more or less than the property earns. A $500,000 property with $30,000 of net operating income has a 6% cap rate. Buy it with $200,000 of investor cash and a $300,000 loan costing $18,000 a year, and the investors receive $12,000 on $200,000, which is also 6%. Make the loan cheaper and the cash-on-cash rises above the cap rate. Make it dearer and it falls below. For a fractional investor with no mortgage of their own, cash-on-cash and dividend yield are usually the same number. The difference is habit: yield is the term for shares and funds, cash-on-cash is the term from direct property investing.

Cash-on-cash is a year-by-year figure, so it changes as rents rise or a unit sits vacant. A listing's projected number is usually the first stabilised year. Ask what happens in year one, when a property may still be filling up, and in year five, when rents should have grown. Compare it against what you could earn elsewhere with the same money and the same lock-up. If a fractional property pays 5% cash-on-cash and your money is committed for seven years, the appreciation has to justify the illiquidity, because the cash return alone may not.