Cash on Cash is a percentage that measures the return on total cash invested in an income producing property. Cash on Cash gives you a quick idea of your return on investment. For instance: a cash on cash of 7% on $100,000 investment means at the end of the year, you take away $7,000 before taxes (Cash on Cash return does not take into account tax consequences on gain).
To calculate Cash on Cash, you need two numbers- the CFBT and Total Cash investment.
Let’s do an example-
Purchase Price: $500,000
Cost of Sale (2.5%): $12,500
Down Payment (20%): $100,000
Loan Amount: $400,000
Terms: 30 year fixed @ 5.5% $2,271/mo. $27,252 /yr
Gross Income: $50,000/yr. (less 3% vacancy) = $48,500
Building Operating Expenses: $15,000
CFBT = 48,500 – 15,000 – 27,252 = $6,248
Total Cash Invesment= 100,000+12,500 = $112,500
Cash on Cash = 6,248/112,500 = 5.5%
Important to note that principal reduction is NOT factored into cash on cash. In the above example $27,252 was made in mortgage payments, of that ~$450 a month went to principal reduction- so that at the end of the year, $5,400 went to principal and $21,852 went to interest. Some are tempted to add this principal reduction into the cash on cash return however, since it is not actual cash that you can invest, and is rather illiquid- you may only access 60% or the property’s value in a refi, and to realize any principal gain you must sell the property and incur a cost of sale and perhaps capital gains tax- Principal Reduction doesn’t count in cash on cash.